Comprehensive Assessment of Firm Financial Performance using Financial Ratios and Linguistic Analysis of Annual Reports

Abstract

Indicators of financial performance, especially financial ratio analysis, have become an important financial decision-support information used by the firm management and other stakeholders to assess financial stability and growth potential. However, additional information may be hidden in management communication. The article deals with the analysis of annual reports of U.S. firms from both points of view, a financial one based on a set of financial ratios, and a linguistic one based on the analysis of other information presented by the firms in their annual reports. Spearman correlation coefficient is used to compare the values of financial and linguistic indicators. For the purpose of the comprehensive assessment, novel word lists are proposed specifically designed for each category of financial analysis. The aim is to assess the information ability of annual reports and assess whether successful firms precisely present their results or not. The results show that the proposed topic dictionaries can be beneficial especially for the assessment of cash flow and leverage ratios.