A simple dimension reduction procedure for corporate finance composite indicators

Financial ratios provide useful quantitative financial information to both investors and analysts so that they can rate a company. Many financial indicators from accounting books are taken into account. Instead of sequentially examine each ratio, one can analyze together different combination of ratios in order to simultaneously take into account different aspects. This may be done by computing a composite indicator. The focus of the paper is on the reduction of the number of partial indicators under consideration to construct a composite indicator. A quick and compact solution is proposed, and a practical application to corporate finance is presented. The results suggest analysts to take into consideration our method since it is much simpler than other dimension reduction methods such as principal component or factor analysis, and so it is much easier to be used in practice by non statisticians (as generally are financial analysts).