Transformed financial ratio models for improved contractor evaluation

The application of financial ratio models for contractor evaluation has been used to provide an overall perspective of a contractor's potential for failure, and to serve as a basis for the contractor's strategic planning. The poor performance of such models has prompted concern over their suitability for such evaluations. The inefficiency of ratio models has been associated with two factors: data quality for model estimation; and the range of classifications that the models can achieve. Analysis with thirty-three basic ratio samples showed that most ratios do not conform to the normality condition required to satisfy the technique for their estimation. Two transformation approaches are proposed to enhance the data quality and to expand the classification range for developing improved ratio models.