Finding critical financial ratios for Taiwan’s property development firms in recession

Ratio analysis is an excellent way of looking into a firm’s financial status. However, in performing the ratio analysis, an often underemphasized task is the selection of ratios for use. In a multi‐criteria decision‐making framework, poor quality of criteria selection, i.e. financial ratios, will consequently undermine the quality of evaluation. Aims at establishing a systematic approach for finding critical financial ratios to assist in financial analysis for the construction industry. As each sector of the industry is intrinsically unique, the set of critical ratios for different sectors will certainly vary. However, the approach for finding useful financial ratios will not distinguish itself with respect to the concerned sector rather than the purpose of analysis. The proposed approach incorporates the concept of multi‐criteria decision making and the entropy method. The approach is demonstrated in a case study in which major property development firms in Taiwan are evaluated.