Ratio analysis comparability between Chinese and Japanese firms

Abstract

PurposeFirms in different countries operate in different business environments and prepare financial statements following, by necessity, their own countries' accounting standards. Benchmarks for assessing financial ratios of firms in different countries are likely to be different. In conducting financial ratio analyses, each country's unique cultural, business, financial, and regulatory characteristics have to be taken into consideration, for these external factors may exert significant effects on measurements of financial data. This study aims to investigate challenges in comparing financial ratios between Japanese firms and Chinese firms.Design/methodology/approachThis study compares ten major financial ratios of 75 Chinese firms with financial ratios of 75 matched sample Japanese firms to determine if a common benchmark for each of the financial ratios can be applied to firms in both countries.FindingsThe results show significant differences in liquidity, solvency, and activity ratios between firms from these two countries. Further examination of differences in accounting standards, economic, and institutional environments between these two countries suggests that these external factors have significant effects on financial ratios and may have contributed to the observed differences.Originality/valueThis study is among the first to investigate the comparability of ratios between Japanese firms and Chinese firms to uncover potential challenges and warn investors of such challenges.