Inter-company comparison using modified TOPSIS with objective weights

By Hepu Deng, Chung-Hsing Yeh, R. Willis. Computers & Operations Research, 2000

994 citations recorded by the source corpus.

Abstract 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. Scope and purpose The performance evaluation and ranking of modern enterprises is a complex process, in which multiple financial ratios are required to be considered simultaneously. The purpose of this paper is to apply the framework of multi-criteria analysis to the inter-company comparison problem. An effective approach based on the concept used by the technique for order preference by similarity to ideal solution (TOPSIS) is developed to rank competing companies in terms of their overall performance on multiple financial ratios. The approach modifies the TOPSIS method by using weighted Euclidean distances to ensure a meaningful interpretation of the evaluation result. The use of objective weights for financial ratios based on Shannon's entropy concept reflects the context-dependent concept of informational importance. This ensures that the evaluation result is not affected by the inter-dependency of criteria and inconsistency of subjective weights. This approach is particularly applicable for situations where reliable subjective weights cannot be obtained. With its simplicity in both concept and computation, the approach can readily be incorporated into a computer-based system.

Subfields: Management Science and Operations Research, Safety, Risk, Reliability and Quality

View Paper: https://www.semanticscholar.org/paper/3da47061be346dceb81c9c053414fe765efa8c0b

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Citations in the corpus

Comparison of weights in TOPSIS models (2004, methodology): “TOPSIS has also been used to compare company performances [17] and financial ratio performance within a specific industry [18].”
An extension of TOPSIS for group decision making (2007, background): “[19] 2 Expatriate host country selection Six major attributes (25 sub-attributes) 10 alternatives Chen and Tzeng [7] 3 Facility location selection Five attributes 4 alternatives Chu [20] 4 Gear material selection Five attributes 9 alternatives Milani et al.”
A three-stage hybrid approach for weight assignment in MADM ☆ (2017, methodology): “[19] used the standard deviation method to calculate objective weights for attributes.”
An in-depth review of theory of the TOPSIS method: An experimental analysis (2020, methodology): “Shyur (2006), Shyur and Shih (2006), Gangurde and Akarte (2013) and Kasirian and Yusuff (2013) presented different applications of Deng et al. (2000) ’ s modi ﬁ ed approach.”
A framework for weighting of criteria in ranking stage of material selection process (2012, methodology): “Also, the objective weighting is particularly appropriate for situations where reliable subjective weights cannot be obtained [32].”
Compromise solution by MCDM methods: A comparative analysis of VIKOR and TOPSIS (2004, methodology): “Deng et al. (2000) presented a modified TOPSIS method, for which they used the ranking index formulated in Eq.”
Application of TOPSIS in evaluating initial training aircraft under a fuzzy environment (2007, methodology): “This approach is demonstrated with a real case study involving 16 evaluation criteria, seven initial propeller-driven training aircraft assessed by 15 evaluators from the Taiwan Air Force Academy.”
A state-of the-art survey of TOPSIS applications (2012, background): “…decision making Evaluation of the performance of 82 Taiwanese mutual funds for consecutive 34 months TOPSIS with different distance approaches Deng, Yeh, and Willis (2000) Ranking the relative performance of competing companies in the textile industry Entropy measure and modified…”