The document under analysis has demonstrated that the WRDS Industry Financial Ratio (WIFR) is a set of financial ratios that academic researchers use to analyze firms’ performance. More than 70 various indicators are included, and they represent seven large categories. They are Efficiency, Capitalization, Profitability, Liquidity, Valuation, Financial Soundness/Solvency, and Others. Each of these groups offers a set of single ratios that are used to assess performance. For example, the Profitability category draws attention to a firm’s ability to generate profits. As a result, this group relies on such indicators as Gross Profit Margin, Return on Investments, and others. The WIFR is adequate for assessing individual companies and whole industries.
It is worth admitting that it is only possible to apply the WIFR to specific companies and even industries. On the one hand, the finance companies are excluded since some of the ratios are not going to generate meaningful results among them. On the other hand, two industry classifications are available to decide on whether a specific industry can be included. For example, the GICS Economic Sector Index mentions ten particular areas, including Energy, Materials, Health Care, and others. Simultaneously, the document under review demonstrates that the Fama-French Industry Classification offers a few classification systems that can be chosen by accessing the appropriate website.
Another essential point refers to the industry-level aggregation of financial ratios. It is so because aggregated levels are included in the output to see the overall picture for a firm or a whole industry. The issue with this phenomenon is that aggregation may not be applied to those ratios that can have negative denominators. In such cases, inadequate results can be achieved, which will lead to wrong conclusions. The WIFR offers a solution to this issue, which refers to relying on the median instead of the mean. This step is practical since it ensures that negative denominators do not distort the results. However, it is up to the WIFR users to choose which aggravation metric to apply.
Furthermore, the summarized document draws sufficient attention to justify the sources and frequency of data. Firstly, it is explicitly explained that the information is obtained from reputable and credible sources. What is more, the WIFR relies on appropriate databases to get specific data. For example, Compustat Quarterly and Annual file is the source of accounting-related details. Secondly, significant attempts are taken to ensure that the aggregated values are offered at a monthly frequency. This state of affairs becomes possible since the WIFR focuses on the most recent data.
It is also rational to admit that the document offers an explicit explanation of how the WIFT deals with outliers that can sometimes appear. It refers to truncating the outliers in the bottom and top percentiles. However, obtaining the final ratio output denotes that these removed values should be replaced, and enforcing a 12-month moving average is a practical solution to the issue. Furthermore, this step leads to smoothing the final output to minimize the outliers’ effect.
Finally, the document offers a detailed overview of the WRDS Industry Financial Ratio. Its information allowed me to understand that the phenomenon under analysis is an effective tool to analyze firms’ and industry’s performance according to multiple criteria. This instrument relies on credible and timely data and draws sufficient attention to ensure that the results are reliable. The document is also valuable since it offers an exhaustive list of the financial ratios and their formulas.