APPLYING FACTOR ANALYSIS TO FINANCIAL RATIOS OF INTERNATIONAL COMMERCIAL AIRLINES

Abstract

The application of factor analysis to the area of financial ratio analysis was pioneered by Pinches, Mingo, and Caruthers (1973) in a study of U.S. industrial firms. During the last two decades numerous studies have applied the technique as a means of eliminating redundancy among financial ratios and/or reducing the number of ratios selected as a basis for further investigation to a limited but crucial subset. It is observed that all studies reported were on the manufacturing and retailing sectors. The international commercial airline sector was chosen as the subject of the present research in an attempt to study the factor groupings in a sector whose financial characteristics differ from manufacturing or retailing. Results show that factor categorization reflects the sector's financial characteristics. The study also draws conclusions on some observed differences between the empirical and theoretical ratio classification observed in the literature. The study lends support to the conclusion that factor analysis provides a useful means by which to develop and test the theoretical structure and grouping of financial ratios.