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Data Description and Preprocessing

For the purpose of the empirical comparison, data on 320 stocks constituting NASDAQ Computer Components Index have been collected from Investing (2019). The data include financial ratios which are given in Table 6.1. Based on the financial theory and previous research, the ratios have been classified into inputs and outputs (last column). The full list of companies observed in the study is given in Table Al in the Appendix. As can be seen in Table 6.1, if a company wants to compare its performance to others, there is a lot of data that need to be processed and taken into consideration. R software was used to perform the DEA and MOORA analyses.[1]

As this research uses DEA as the main methodological approach of modelling, due to the nature of the data, the following steps are made. First, the companies

TABLE 6.1

List of Financial Ratios Used in the Study with Description Full Name of Financial

Ratio

Abbreviation

Description

DEA: 1 vs. О

5-year capital spending growth 5YA

CSG

Growth rate of company’s investing into capital to maintain and grow business.

0

5-year EPS growth 5YA

EPS_G

Growth rate of EPS over the 5-year horizon.

0

5-year sales growth 5YA

S_G

Growth rate of company’s sales over the 5-year horizon.

0

Asset turnover TTM

AT

Ratio of company’s net sales revenue and the average total assets value. Higher value of this ratio means that company is generating more revenue per monetary unit of assets.

0

Basic EPS ANN

BEPS

Ratio of company’s net income reduced by preferred dividends and the number of shares outstanding.

0

Book value/share MRQ

BV/S

Ratio of difference between company’s total equity value and preferred equity and the number of shares outstanding. If a market share price is smaller compared to the BV/S. the company could be considered undervalued.

0

Cash flow/share TTM

CF/S

Ratio of a company’s after-tax earnings increased by depreciation and number of shares outstanding. Greater values indicate company’s status to generate cash.

0

Cash/Share MRQ

C/S

Ratio of company’s total cash and number of shares outstanding. A great value of this ratio could indicate that a company is performing well but can also indicate a cost of capital inefficiency.

I

Current ratio MRQ

CR

Ratio of company’s current assets and liabilities. Best value is if the ratio is around 1:1. (See Tracy 2004.)

Unit value; 0

Diluted EPS ANN

DEPS

Ratio of company’s net income reduced by preferred dividends and number of shares outstanding increased with the conversion of dilutive securities.

Indicates the worst-case scenario in terms of EPS

0

Dividend growth rate ANN

DGR

Growth rate of the dividend yield.

0

Dividend yield 5-year avg, 5YA

DY5Y

Ratio of company’s annual dividend payment and the market capitalization; 5-year average.

0

TABLE 6.1 (Continued)

List of Financial Ratios Used in the Study with Description Full Name of Financial

Ratio

Abbreviation

Description

DEA: 1 vs. О

Dividend yield ANN

DY

Ratio of company’s annual dividend payment and the market capitalization.

0

Inventory turnover TTM

IT

Ratio of company’s net sales and average inventory. Higher value means that company could have inadequate inventory levels (too low); lower value could mean that company is overstocking.

0

LT debt to equity MRQ

LTD/E

Ratio of company’s long term debts and the total shareholders’ equity. Higher ratio means the company is more risky.

I

Net income/employee TTM

NI/E

Ratio of company’s net income and number of employees.

0

P/E ratio TTM

P/E

Ratio of a company’s share price to the company’s EPS. High P/E ratio indicates that the market perceives it as lower risk or higher growth or both when compared to a company with a low P/E ratio.

0

Payout ratio TTM

PR

Ratio of company’s dividends paid to shareholders and the net income. Greater value indicates that firm is more mature and it does not need to reinvest much more of the net income it earns.

0

TABLE 6.1 (Continued)

List of Financial Ratios Used in the Study with Description Full Name of Financial

Ratio

Abbreviation

Description

DEA: 1 vs. О

Price to book MRQ

P/B

Ratio of company’s market capitalization and company’s total book value. Empirical research has shown that low P/В stocks outperform high P/В stocks.

I

Price to cash flow MRQ

PCF

Ratio of a company’s market capitalization with the company’s operating cash flow. The greater the value of this ratio, the lower the value of the stock is (firm is not generating enough cash flows).

I

Price to free cash flow TTM

PFCF

Ratio of a company’s market capitalization to company’s free cash flow. Higher value of this ratio indicates that the company could be overvalued; it cannot generate additional revenues.

I

Price to sales TTM

P/S

Ratio of a company’s market capitalization by revenues. The greater the ratio, the worse the investment is due to paying more for a more than each unit of sales.

I

Price to tangible book MRQ

P/TB

Ratio of company’s share price to tangible book value per share. Interpreted as amount of money investor (shareholder) would receive if the company would shut down and liquidate all assets. Lower value of this ratio indicates smaller possible share price losses.

I

Quick ratio MRQ

QR

Ratio of company’s liquid assets and quick liabilities. Best value is if the ratio is around 1:1. (See Tracy 2004.)

Unit value; 0

Receivable turnover TTM

RT

Ratio of company’s net credit sales and average accounts receivable. If a company is more effective in collecting its receivables, the ratio is bigger.

0

Return on assets 5YA Return on assets TTM

ROA5Y

ROA

Ratio of company’s net income and total assets. Smaller values mean that company is less able to generate income from the assets it uses.

0

Return on equity 5YA Return on equity TTM

ROE5Y

ROE

Ratio of company’s net income and equity. Smaller values mean that company is less able to generate income from the equity it uses.

0

Return on investment 5YA Return on investment TTM

ROI5Y

ROI

Ratio of company’s net income and cost of investment. Smaller values mean that company is less able to generate income from its investments.

0

TABLE 6.1 (Continued)

List of Financial Ratios Used in the Study with Description

Full Name of Financial Ratio

Abbreviation

Description

DEA: 1 vs. О

Revenue/employee TTM

R/E

Ratio of company’s total revenue and number of employees.

0

Revenue/share TTM

R/S

Ratio of company’s total revenues and number of shares outstanding. Higher values indicate greater revenues.

0

Sales (MRQ) vs. Qtr. 1 Yr. ago MRQ

S_Q

Growth rate of company’s sales, quarter of this year compared to same quarter of last year.

0

Sales (TTM) vs. TTM 1 Yr. ago TTM

S_TTM

Growth rate of company’s sales, trailing 12 months this year compared to same trailing 12 months of last year.

0

Tangible book value/share MRQ

TBV/S

Ratio of company’s total tangible assets and number of shares outstanding. Higher values indicate company has a lot in value regarding tangible assets.

0

Total debt to equity MRQ

D/E

Ratio of company’s total liabilities and the total shareholders’ equity. Higher ratio means the company is more risky.

I

Source: Investing (2019)

Note: TTM, 5YA, and MRQ denote Trailing Twelve Months, 5-Year Average, and Most Recent Quarter, respectively. I and О denote input and O, respectively.

which had only a few data available were removed from the analysis. Thus, the initial sample of companies was reduced to 292. This is due to some companies having only a couple of data available, but the number of other ratios that were not available was too big. Maybe some newer companies do not have specific data available yet and introducing artificial values of inputs and outputs (penalties in the mentioned approach in the methodology section) could hurt its performance. Second, the Kuosmanen (2009) approach was applied to fill the gaps in data for the companies which had only a few missing data. Third, the correlation matrix between all inputs and outputs was estimated and is shown in the Appendix in Table A2. As DEA models do not need all of the financial ratios to compare one company to others, only those inputs and outputs were chosen in the end which filled the following criteria: inputs being correlated very low one to another, the same was observed for outputs, inputs and outputs which had the greatest correlations one to another, and those inputs and/or outputs were given a slight advantage if they were calculated based on the last 12 months and 5-year averages compared to those calculated in the last quarter. These ratios contain more information about the company compared to the last quarter. The final inputs and outputs used in the study are the following ones.

Output variables consist of P/E Ratio TTM, Return on Investment TTM, EPS (TTM) vs TTM l Year Ago, Asset Turnover TTM, Dividend Yield 5YA, whereas inputs include Price-to-Sales ratio TTM, Price-to-Cash Flow MRQ, Price-to-Tangible Book Ratio MRQ, and Cash/Share MRQ. Thus, the rest of the analysis is performed based on the mentioned ratios.

Another approach of choosing the inputs and outputs for the analysis could consist of asking the managers (or investors) in which specific aspects of the business itself they are interested in. This should be done carefully, as the results could differ compared to the approach from the mathematical optimization and statistical properties of correlations in this research. This opens interesting questions for future work which should consider such issues.

  • [1] The following packages were utilized: DJL, Benchmarking and MCDM, with all of the code providedin their respective documentation.
 
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