Augmenting the Analysis of Financial Statements with Technical Stability Indices in Data Envelopment Analysis

Abstract

One shortcoming of traditional financial statement analysis is the inability to simultaneously evaluate financial component interactions within and among organizations. Analysis provides a measure of technical Data Envelopment efficiency that facilitates such an evaluation. In this paper, we explore the use of technical efficiency indicators to augment the analysis of financial statements by developing technical stability indices based on the Du Pont analysis for Return on Equity. An initial analysis of the oil industry indicates that there is a positive relationship between economic and technical efficiency measures. Subsequent analysis of specific oil industry organizations demonstrates how these economic and technical efficiency measures can be used jointly as information gathering techniques for the analysis of financial statements. It is then shown how these information gathering techniques provide complementary analyses within the context of managerial decision making.