Financial ratios are often used to classify firms into different clusters of financial performance. This study aims to classify firms using financial ratios with advanced techniques and identify the transition matrix of firms moving clusters during the COVID-19 period.
This study uses compositional data (CoDa) analysis based on existing clustering methods with transformed data by weighted logarithms of financial ratios. The data include 66 listed firms in Vietnam’s food and beverage and fishery sectors over a three-year period from 2019 to 2021, including the COVID-19 period.
These firms can be classified into three clusters of distinctive characteristics, which can serve as benchmarks for solvency and profitability. The results also show the migration from one cluster to another during the COVID-19 pandemic, allowing for the calculation of the transition probability or the transition matrix.
The findings indicate three distinct clusters (good, average and below-average firm performance) that can help financial analysts, accountants, investors and other strategic decision-makers in making informed choices.
Clustering firms with their financial ratios often suffer from various limitations, such as ratio choices, skewed distributions, outliers and redundancy. This study is motivated by a weighted CoDa approach that addresses these issues. This method can be extended to classify firms in multiple sectors or other emerging markets.
