Academic journal article Journal of Business Economics and Management

Investment Decision Making Using a Combined Factor Analysis and Entropy-Based TOPSIS Model

Academic journal article Journal of Business Economics and Management

Investment Decision Making Using a Combined Factor Analysis and Entropy-Based TOPSIS Model

Article excerpt

1. Introduction

Performance evaluation of enterprises is an important part in modern enterprise management. Advantages and disadvantages of financial performance may represent whether the operating ability of an enterprise is good or bad. Financial performance evaluation can also better display enterprise's future growth and development potential. In the early days, return on assets (ROA) and return on equity (ROE) were the two main indicators used in financial performance evaluation. However, ROA and ROE cannot represent the true operating performance of an enterprise. Therefore, a number of financial ratios have been selected to measure companies' financial performance. However, from an enterprise's point of view, all investments and all profits have different risks. Therefore, enterprises use capital to create profits, but also to bear the risk of loss. This means that the performance evaluation criteria must be combined with risk indicators; this can express the advantages and disadvantages of financial performance more accurately and thoroughly.

There are still many problems in the field of financial performance evaluation, such as: (1) how to determine the evaluation criteria?, (2) how to evaluate the performance? Measures of financial performance do not only show the enterprise's financial conditions or operating loss. In fact, the real purpose of financial performance evaluation is to identify the impact of influential factors on the financial situation and to assist enterprise managers in improving the future direction of their companies. Through a review of previous literature, many researchers use different methods to evaluate the financial performance of companies. One of the most widely used methods is traditional financial ratios analysis (Laitinen 2000). For example, Secme et al. (2009) used 27 financial ratios to measure a bank's financial performance evaluation. Walsh (1996) also pointed out that the use of financial ratios as an indicator of business evaluation is the most appropriate because it provides clear goals and standards. Wang (2008, 2009) used ratio analysis (21 financial ratios) for financial performance evaluation, and in order to avoid repeated evaluation on the same financial ratios, financial ratios were classified into several clusters. Yurdakul and Ic (2004) used financial ratios as a measure of variables in the analytical hierarchy process (AHP) model, followed by the TOPSIS method to obtain financial performance scores of Turkish automotive companies and textile companies. Therefore, this study also uses financial ratios as an indicator of enterprise performance evaluation.

Multiple criteria decision making (MCDM) is a decision-making process which is used for performance evaluation. The use of MCDM techniques for company's performance evaluation can be divided into two parts: the first part ensures the weight of the evaluation criteria and the second part obtains the ranking of each company. When the weight of the criteria identified, the performance criteria selected for performance evaluation is one of the important topics. The weight method can be basically classified into two types: subjective weight and objective weight (Xie et al. 2008). Both methods have their strengths and weaknesses. The subjective weight method has the advantage of explaining the evaluation clearly, and the objective weight method is applied to explain the evaluation in data (Wang et al. 2008). For a recent review of the application of the weight methods, the entropy weight is a kind of objective weight. This kind of weight has been used in performance evaluation studies (Chang et al. 2010; Chiang, Hsieh 2009; Chou, Tsai 2009; Wang et al. 2008; Wang, Lee 2009; Zou et al. 2006). Therefore, this study uses the entropy method to calculate the weight of performance evaluating indicators.

In previous studies of MCDM (Zavadskas, Turskis 2011), many methods have been proposed and widely used in the ranking of performance evaluation, such as the Simple Additive Weighting (SAW) (Ginevicius et al. …

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