Inter-company comparison using a modification of the technique for order preference by similarity to ideal solution (TOPSIS) with objective weights

Simultaneous consideration of multiple financial ratios is required to adequately evaluate and rank the relative performance of competing companies. This paper formulates the inter-company comparison process as a multi-criteria analysis model, and presents an effective approach by modifying TOPSIS for solving the problem. The modified TOPSIS approach can identify the relevance of the financial ratios to the evaluation result, and indicate the performance difference between companies on each financial ratio. To ensure that the evaluation result is not affected by the inter-dependence of the financial ratios, objective weights are used. As a result, the comparison process is conducted on a commonly accepted basis and is independent of subjective preferences of various stakeholders. An empirical study of a real case in China is conducted to illustrate how the approach is used for the inter-company comparison problem. The result shows that the approach can reflect the decision information emitted by the financial ratios used. The comparison of objective weighting methods suggests that, with the modified TOPSIS approach, the entropy measure compares favourably with other methods for the case study conducted.