Answer:
The purpose of the article stated seems that the academicians are trying to eliminate the ratio analysis as it is used as an analytical tool in analyzing the financial performance of the company. The basic purpose of the article is to define the quality of ratio analysis as a technique of analytical. While the scope of the article is for the fulfillment of the purpose the academics have taken a case of bank bankruptcy. As liquidity, solvency, and profitability ratios are considered as one of the most important ratios, but it may differ as the audience to the financial statement changes. The article discusses about how to analyze the importance of any ratio (Altman, Edward, 589-609). The classification of the given article for the problem, the article has taken MDA that is multiple discriminant analysis as required statistical technique. This technique is not commonly used as regression analysis. This technique was firstly used in 1930s. This analysis is mainly used in behavioral and biological science. The findings and influences of the article is that the article depicts about financial analysis in traditional era. According to the article the financial analysis in traditional era was done in qualitative aspect as there was no any ratio or any specific format of financial statements (Discriminant analysis, 2-16). During that time the information to be provided were also in a qualitative format that is it depicts about the credit worthiness of merchants. During the period of 1930s it was found that the failure companies and continuing companies had many variations. Besides this the large corporations were facing very difficulties in meeting their fixed debt obligations (Bramhandkar,Alka). The potential biasness in the given article is that there is biasness in the analysis of ratios as there is any change occurs in the audience. A company having poor solvency or profitability ratios may be considered as bankrupt according to ratio analysis concept. But this statement can be proven wrong if the company has above liquidity ratio as required by the industry norms (Jingbo,Zin et al, 1-10). Besides this when the firm uses different variables the related accuracy got affected. According to Chijoriga 2011, the financial ratios are a good source of classification and prediction of firm’s variables. Even bank also uses MDA analysis in predicting the customers’ ability for repayment of loan and interest amount. The importance of this analysis for financial managers is that as it is used to classify an observation into several groups based on priority. It is useful for depicting about predictions related to a project analyzing the problems in dependent variables which are in qualitative from such as bankruptcy. Besides this it also depicts about variations between securities simultaneously it also allows the manager to evaluate other variables (Chijoriga, M, M, 132-147). However this analysis is also compared with credit scoring method in the banking culture. It helps to determine the classification of different variables and provisions regarding bad debts. In case of financial institutions the use of MDA analysis would drastically reduce nonperforming assets amount if they would use this. Hence it can be said as this analysis has been showcased its importance since it was firstly used in 1930s
References
Altman, Edward, I. Financial ratios, Discriminant analysis and the prediction of corporate bankruptcy. http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1968.tb00843.x/full (1968) 589-609.
Bramhandkar,Alka,J. discriminant analysis: applications in finance. The jounal of applied business research. New York 1-5.
Chijoriga, Marcelina, Mvula. Application of multiple discriminant analysis (MDA) as a credit scoring and risk assessment model. http://www.emeraldinsight.com/doi/pdfplus/10.1108/17468801111119498 (2011) 132-147.
Discriminant analysis, lesson 2nd, multivariate data analysis using SPSS https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=14&cad=rja&uact=8&sqi=2&ved=0ahUKEwiBzd7h_OvRAhXDrI8KHRIuDXoQFghZMA0&url=https%3A%2F%2Fwww.researchgate.net%2Ffile.PostFileLoader.html%3Fid%3D54eb12afef97130f298b4576%26assetKey%3DAS%253A273713604300800%25401442269816239&usg=AFQjCNGcbf8r5hWIgK0uIr9xNwv8LU1l5Q&bvm=bv.145822982,d.c2I 2-16.
Jingbo,Zin. Na,Ye. Xinzhi,Chang, Wenliang, Chen & Tsou, Benjamin,K. Using multiple discriminant analysis approach for linear text segmentation http://www.aclweb.org/anthology/I05-1026 (2005) 1-10.
