Univariate and multivariate financial analysis are two distinctly different forms or models of financial data analysis. If you focus firstly on the prefixes uni- and multi- where uni means singular and multi, plural, then you start to get an idea of the general differences between the two forms of analysing.
The two models – univariate and multivariate financial analysis, are widely regarded as being the two most important ways to determine the likelihood of financial success, or failure if you have more of a pessimistic leaning, for any individual company. To begin, a separate explanation of both forms of financial analysis follows:
Univariate financial analysis
This model works around the key that only one variable is utilized for the predicting of upcoming financial trends in a company. This form of analysis was devised by the former president of the American Accounting Association, William Beaver, back in the 1960’s and took notice of a single factor in the financial workings of a company, by using a particular data ratio, to determine the successful outlook of same.
As an analytical model, it has been used to achieve modest predictive results. The most beneficial variables to analyse are of three ratio types: cash flow/ total debt, net income/total assets and total debt/total assets. What the analyser is doing by closely examining a company’s performance through one of these variables is determining whether the likelihood of bankruptcy or some other type of financial insolvency is probable. There is a certain simplicity to univariate financial analysis with its singular point of examination and it is an analytical model that continues to last.
Multivariate financial analysis
This type of financial analysis is sometimes known as Multiple Discriminant Analysis. The most well known form of this model of financial analysis was devised by Edward I. Altman, a Professor of Finance at New York’s Stern School of Business. Multivariate financial analysis was created to try and establish a clearer and more accurate way of predicting business financial failure. A comparitively complex system utilizing five different financial ratios to ascertain a Z-score for the company that is being analysed – the score obtained reveals how likely a company may go bankrupt; there is a measurable showing of performance in relation to that of other companies. As far as financial analysis models go, multivariate financial analysis is a more complicated way to pinpoint the profitability or financial risks within a particular business structure.
Difference between univariate and multivariate analysis
The univariate model allows the analyser to focus on data from a singular perspective; there’s a certain one-track-mind type of examination, sometimes resulting in findings that can seem unclear and occasionally contradictory. It could be argued the multivariate model is a more thorough approach in ascertaining the big picture status of any company. Some statistics put the success rate of multivariate analysis as high as 70 – 80 percent. It is a useful tool in diagnosing the financial health of any business. Probability of bankruptcy can also be predicted for a two year window period.
Wikipedia, Globalriskguard.com and Hubpages were consulted in the writing of this article.