Application of Factor Analysis on the Financial Ratios of Indian Cement Industry and Validation of the Results by Cluster Analysis

Financial ratio analysis is an important and commonly used tool in analyzing financial health of a firm. Quite a large number of financial ratios, which can be categorized in different groups, are used for this analysis. However, to reduce number of ratios to be used for financial analysis and regrouping them into different groups on basis of empirical evidence, Factor Analysis technique is being used successfully by different researches during the last three decades. In this study Factor Analysis has been applied over audited financial data of Indian cement companies for a period of 10 years. The sample companies are listed on the Stock Exchange India (BSE and NSE). Factor Analysis, conducted over 44 variables (financial ratios) grouped in 7 categories, resulted in 11 underlying categories (factors). Each factor is named in an appropriate manner considering the factor loads and constituent variables (ratios). Representative ratios are identified for each such factor. To validate the results of Factor Ana...