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Financial Network Analysis on the Performance of Companies Using Integrated Entropy-DEMATEL-TOPSIS Model.

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  • 1Department of Physical and Mathematical Science, Faculty of Science, Universiti Tunku Abdul Rahman, Kampar Campus, Jalan Universiti, Bandar Barat, Kampar 31900, Perak, Malaysia.

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Summary
This summary is machine-generated.

This study introduces a novel multi-criteria decision-making model integrating entropy-DEMATEL and TOPSIS to analyze financial ratios

Keywords:
DEMATELTOPSIScausal relationshipentropyfinancial ratiomulti-criteria decision making

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Area of Science:

  • Finance
  • Decision Sciences
  • Data Analysis

Background:

  • Financial performance analysis is crucial for investment decisions.
  • Understanding the causal relationships between financial ratios and performance is complex.
  • Existing models may not fully capture the network effects of financial indicators.

Purpose of the Study:

  • To propose and validate an integrated multi-criteria decision-making (MCDM) model for analyzing financial ratio causality.
  • To identify key financial ratios influencing company performance.
  • To aid investors in portfolio selection through a robust ranking system.

Main Methods:

  • Integration of Entropy-DEMATEL and TOPSIS models for causal relationship analysis.
  • Application of the model to financial data from Dow Jones Industrial Average (DJIA) companies.
  • Validation through a mean-variance portfolio investment model.

Main Results:

  • Financial ratios are categorized into cause (e.g., ROE, DER) and effect (e.g., CR, EPS, ROA, DAR) groups.
  • Return on Equity (ROE), Current Ratio (CR), and Debt to Equity Ratio (DER) identified as the most influential.
  • The proposed model generated higher mean returns than the DJIA benchmark with minimal risk.

Conclusions:

  • The entropy-DEMATEL-TOPSIS model effectively determines the causal network of financial ratios impacting performance.
  • The model provides a valuable tool for investors to identify high-performing companies for portfolio investment.
  • The model demonstrates superior performance in generating returns within risk constraints, excluding short sales.