Operational Capability Analytics – A Data Envelopment Analysis on firm’s fundamental data

Operational Capability Analytics – A Data Envelopment Analysis on firm’s fundamental data

Niklas Bayrle, Leo Brecht

Niklas Bayrle, Leo Brecht "Operational Capability Analytics – A Data Envelopment Analysis on firm’s fundamental data " Published in International Journal of Trend in Research and Development (IJTRD), ISSN: 2394-9333, Special Issue | ICAST-17 , December 2017, URL: http://www.ijtrd.com/papers/IJTRD14627.pdf

There are various approaches to assess a firm’s financial performance. Typically, financial ratios or metrics on supply chain performance are calculated and evaluated to assess a firm’s financial performance. Problems often arise when firms from different industries, sizes and countries are evaluated because of the underlying linearity assumption in benchmarking comparisons. To overcome these difficulties we suggest to measure financial performance differently, which we call Operational Capability Analytics. We define the operational capability as the potential to translate firm's assets etc. efficiently into revenue, earnings etc.. We can show that the resulting efficiency score is highly correlated with a firm's financial performance represented by classical financial performance indicators. In this paper, the Banker, Charnes & Cooper (1984) (BCC) and Charnes, Cooper & Rhodes (1978) (CCR) Data Envelopment Analysis (DEA) models are used to calculate this operational capability. We use multiple input and output factors from the balance sheet, income and cash flow statement. The advantage of our non-parametric approach is that we can calculate the financial performance of different firms without knowing a priori the relationship between the input and output variables and their corresponding weights. We are able to show that our methodology can assess a firm’s financial performance by deploying a correlation analysis to other performance indicator. As well, we establish a relationship to the stock market. An equity portfolio based on best performing firms calculated by our Operational Capability Analytics shows much better returns than portfolios composed by the worst firms. The yields are even better in the long run. Therefore, our conclusion is that operational capabilities pay off over a mid-term time horizon (> 1y). The market acknowledges the performance of the best operating firms. Our results can have useful implications for investment management. The BCC DEA model in general was the more valuable one in comparison with the CCR DEA model in this study. In the discussion, we show the limitations of our studies and how they can be solved and further developments.

DEA; Data Envelopment Analysis; Firm Performance; Operational Capability; Financial Performance; Fundamental Analysis; Portfolio Selection

Special Issue | ICAST-17 , December 2017


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