Methodological Implications of Non‐normally Distributed Financial Ratios

Empirical studies have shown distributions of financial ratios are skewed. An explanation for this is given and it is argued that in such circumstances comparison of a fmancial ratio with some norm (e.g. industry average) is likely to misinform. It is also shown that where financial ratios are used as inputs to statistical models normality is irrelevant but a method of transformation into a normal distribution is provided whereby original interrelationships are preserved. Finally, because of the inadequacies of financial ratios, it is shown how regression analysis may be used in financial statement analysis.