International Journal of Empirical Finance

Vol. 4, No. 5, 2015, 291-297

Credit Evaluation of Accepted Companies in Tehran Stock Exchange

Using Topsis-Fuzzy Technique
Ahmadreza Maserat1, Hamed haghtalab2, Amir Shams Koloukhi3, Hosein Parsian4
Abstract
The lack of having a proper tool for evaluating companies ability in paying debts is a reason which creates
problem for managing credit risk. This study introduces Topsis technique for evaluating the risk of not
paying debts and credit ranking of manufacturing companies in Tehran Stock Exchange. Results showed that
using Topsis technique can remove extant shortcomings in ranking industry of Iran which has fallen behind
its counterparts such as Malaysia, India, and Pakistan. One advantage of this technique for increasing
information asymmetry of investors, creditors and efficiency level of capital market of Iran is an important
part of economic sections. Performing Topsis technique assisted determining companies with the highest
scores in paying debts in due time, identifying the rank of each company regarding calculated score and their
ranking.
1. Introduction
Nowadays, spreading banks and hedge funds and paying loans which is the most important duty of them
has necessitated credit measurement of the companies regarding different factors. Banks have a large amount
of data whose processing is difficult. Thus, this study uses Topsis-FUZZY technique to analyze these data. In
previous studies, no operational model was offered. Using Topsis-FUZZY technique has created the
possibility of comparing quantitative variables operationally, providing the possibility of ranking companies
scientifically and precisely. Such ranking can be used in paying loans or identifying its levels for each
company.
2. Theoretical background
One necessary tool for economic development of each country is having an efficient bank system. Any
attempts for improving this system leads to promoting savings, investment, resource allocation, using
potential facilities for the progress and social welfare. Proper correlation of financial systems and
manufacturing mechanisms is an important factor of economic growth and development in any country. As
the main part of financial system, banks play the main role in financial provision of manufacturing, business,
and even public sections. At the moment, a main part of collecting low savings of households and their
optimum allocation to the profitable projects of economic corporates (equipping and allocating financial
resources optimally) are on the banks. Even in America as the country with basic security system, only 32%
of financial provision of companies is through stock exchange markets (Pourian, 2001). But, the main role in
this regard belongs to the banks. For the reasons such as underdevelopment of capital market and other nonbank and contract networks for financial provision of real economic section, this duty is on the banks in Iran
as well.

Department of management, Torbat-e-Jam Branch, Islamic Azad University, Torbat-e-Jam, Iran

Department of management, Torbat-e-Jam Branch, Islamic Azad University, Torbat-e-Jam, Iran
3
Young Researchers and Elite Club, Torbat-e-Jam Branch, Islamic Azad University, Torbat-e-Jam, Iran
4
Young Researchers and Elite Club, Torbat-e-Jam Branch, Islamic Azad University, Torbat-e-Jam, Iran
2

2015 Research Academy of Social Sciences

http://www.rassweb.com

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Since banks have high profitability for the nature of their actions, they face many risks as well. Some
important risks include credit risk, strategic risk, liquidity risk, and market risk among which credit risk is the
most important. Credit risk refers to the possibility of loss occurrence in a credit operation such as financial
crisis, loan-taker situation, or bankruptcy, leading to the loss of asset value.
Regardless of the goal for following, all creditor institutes put themselves in the risk of not paying loans
by the users in a way that such risks are natural for them. Consequences of such risks may be severe financial
predicaments or even bankruptcy for those institutes. Thus, long-term success of a financial enterprise relies
on its optimum risk management. Management philosophy of bank risks depends on the goal which banks
follow, i.e. increasing stockholders return in the frame of risk occurrence possibility. Risk management
focuses on measuring and controlling risks; in this way, risks can be ranked properly and necessary capital
can be allocated.
At the moment, a high amount of outstanding debts and loans of banks show the lack of a correct credit
risk s management system in the bank system and the lack of connecting a reasonable relation between risk
and return. Generally, creating a reasonable relation between risk and return is the main factor in allocating
optimal resources and guarantying bank profitability.
By increasing company number and the need of these companies to new investments, the number of
requests to the banks for receiving loan by the companies enhances. Thus, the ability of companies in paying
debts is an important concern of banks. For the uncertainty in receiving loans and their interests, banks aim
to evaluate profitability of the companies activities and their investments in new sections. In other words,
banks use variables such as financial and non-financial ratios such as income-making capacity, the ability of
controlling costs, and etc to evaluate companies. This study prioritizes companies for donating loans using
Topsis-FUZZY technique. There have been many studies on the financial performance of companies and
their ranking. About the best sales and the worst sales, Jegadish and Titman (1993) showed that the
companies with higher return have better performance in a time period of 3-12 month (1% in a month).
Babic and Plazibat (1998) ranked companies based on mulicriteria analysis. They used AHP method for
identifying the weights of measures (efficiency measures) and PROMETHEE method for final ranking. Their
goal was representing a method for answering financial questions of the companies at any moment.
Pitroski (2000) used the information of financial statements for differentiating successful and
unsuccessful companies. The main question of the study was Can using basic analyses based on the
accounting of the companies with high ratio of book value to market value yield higher return? He used F
statistics for differentiating successful companies from unsuccessful ones. Some of his main variables were
profit margin, stock return, and etc. This study showed that companies with high ratio of book value to
market value yield higher return.
Cai and Wu (2001) conducted a study on financial evaluation. At the first step, they examined
classification of primary financial evaluation system using hierarchical analysis and classified them into 4
groups using thirteen financial indices. Then, they offered a model by DEA to identify more efficient units.
Johnson and Soenen (2003) compared financial data of 478 companies from 1998-1982 to identify
success factors in financial success of the companies. Financial success was measured using Sharp Ratio,
Johnson Alpha, and EVA. Ten companies were regarded and by pair comparisons, companies and indices
were compared. Results showed that companies with high profitability, efficient capital management, and
high assurance degree towards their businesses are the most successful.
Ertugrul and Karakasoglu (2007) evaluated the performance of cement manufacturing companies of
Turkey using Topsis-FUZZY technique. They aimed to offer a FUZZY model for evaluating companies
performance using financial ratios. FAHP method was used by decision-makers in identifying measures
weight and then they were ranked by Topsis technique.

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3. Methodology
Hypothesis
H1.Financial ratios of the company affect its creditability.
H2.Current ratio of the company affects its creditability.
H3. Future ratio of the company affects its creditability.
H4. Ratio of companies activities affects corporate creditability.
H5. Ratio of companies investments affects corporate creditability.
H6. Ratio of companies profitability affects corporate creditability.
Assessing credit of companies by Topsis-FUZZY technique
Topsis-FUZZY technique was used by Chen in which triangle Fuzzy numbers were utilized. Steps of
Topsis-FUZZY technique are as follows:
Step 1: Forming decision matrix of D

D matrix is a M N matrix, created with Fuzzy data. Columns of this matrix are measures for assessing
corporate credit.
Data of Topsis-FUZZY matrix was provided from Tehran Stock Exchange market. Stock information
entered Topsis-FUZZY matrix in the form of triangular Fuzzy numbers.
values
Very low
Low
Average
Much
Very much

Corresponding
fuzzy number
(0, 0, 20)
(0, 20, 40)
(30, 50, 70)
(60, 80, 100)
(80, 100, 100)

Source: Caraman (2007)

Step 2: Normalizing decision matrix

Fuzzy numbers are in triangular form and the following equation holds about them:
ij = (ij , ij , ij )

j = (j , j , j )

This step is called normalization of decision matrix. First, maximum value of every
j+ and minimum value of every j should be identified. Then, using the following
equation, rij values are calculated. When xij s are fuzzy, rij s will be fuzzy.
Now, if j + = (j + , j + , j + ) and j = (j , j , j ) are the maximum and minimum scores, the following
equations will hold:

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The first equation holds when jth measure has a positive aspect and the second equation is when jth
measure has a negative aspect
Accordingly, D matrix turns into normalized D matrix.

Step 3: Calculating weighted normalized matrix

Measures of Topsis-FUZZY matrix should be weighted. Suggested weights in Yordakel and Tansel
(2004) were considered as factor weights. Elements of weighted normalized matrix (ij ) for triangular fuzzy
numbers are calculated by the following equations:

Calculation results enter matrix V as follows:

Step 4: Identifying positive and negative ideal answers

This step yields positive and negative ideal answers. In Fuzzy state, for identifying j j +ranking
processes are used. In this method, the rank of Fuzzy number (ij ) shown with (ij ) is defined as follows:
( ) =

2
2

+
+ . + .

3( + )

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International Journal of Empirical Finance

After calculating M (ij ) for every j column, (ij ) with maximum (ij ) is introduced as j + andij with
minimum value of (ij is introduced as j .

Step 5: Calculating distance of every alternative from positive and negative ideals (+
)
For Fuzzy data, the distance between two fuzzy numbers based on Lotfizadeh is as follows:

= 1 sup {min (), ()}

+

= 1 sup {min (), + ()}

This relation for triangular fuzzy numbers can be generalized as follows:

and
are definite numbers and the distance of ith element from positive ideal is as follows:
n

i+

= D+
ij
j=1

And the distance of ith element from negative ideal is as follows:

n

= D
ij
j=1

Step 6. Calculating proportional nearness of every element to ideals (+

)
This index is used for combining + :
i+ =

+ +

Step 7: Ranking elements in a descending order of +

Final step of Topsis-FUZZY technique is ranking elements in the descending order of i+ . At this step,
companies are ranked based on the scores of credit assessment.
Identifying priorities for allocating credit to companies
At this stage, by comparing the results of previous stages for the companies receiving the highest and
lowest scores, credit allocation for returning loans are determined.

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A. Maserat et al.
Statistical Population And Sample
Statistical population included all cement companies in Tehran Stock Exchange. Since these companies
are few, all 29 companies were considered as the sample. As shown in Table 1, performing Topsis-FUZZY
technique, companies with the highest score in paying debts in due time were identified and ranked based on
those scores.
Company
Hormozgan Cement
Khoozestan Cement
Gaen Cement
Esfahan Cement
Sofian Cement
Kurdistan Cement
Sefidney Cement
Ardebil Cement
Kerman Cement
Sepahan Cement
Dashtestan Cement
Shomal Cement
Karoon Cement
Dorood Cement
Khash Cement
Shargh Cement
Orumieh Cement
Tehran Cement
Behbahan Cement
Darab Cement
Hegmatan Cement
Ilam Cement
Irangach Cement
Mazandaran Cement
Fars Cement
Bojnoord Cement
Khazar Cement
Gharb Cement
Shahrood Cement

Table 1
( )Score
0.03630
0.03583
0.03560
0.03551
0.03547
0.03538
0.03528
0.03513
0.03500
0.03487
0.03486
0.03481
0.03478
0.03465
0.03461
0.03455
0.03439
0.03433
0.03430
0.03419
0.03419
0.03413
0.03387
0.03362
0.03305
0.03302
0.03282
0.03281
0.03266

Rank
1
2
3
4
5
6
7
8
9
11
11
12
13
14
15
16
17
18
19
21
21
22
23
24
25
26
27
28
29

4. Results
H1 Test Results
H1 examined the relationship between variables of current ratio and corporate credit. Since p-value is
below 0.05, H1 is confirmed at 0.05% significance level. Thus, current ratio can be a proper index in
identifying debt payment and a good index for ranking credits of the companies.
H2 Test Results
H2 examined the relationship between variables of future ratio and corporate credit. Since p-value is
below 0.05 (0.003), H2 is confirmed at 0.05% significance level. Thus, future ratio can be a proper index in
identifying debt payment and a good index for ranking credits of the companies.
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International Journal of Empirical Finance

H3 Test Results
H3 examined the relationship between variables of profitability ratio and corporate credit. Since pvalue is below 0.05 (0.018), H3 is confirmed at 0.05% significance level. Thus, profitability ratio can be a
proper index in identifying debt payment and a good index for ranking credits of the companies.
H4 Test Results
H4 examined the relationship between variables of activities ratio and corporate credit. Since p-value is
below 0.05 (0.002), H4 is confirmed at 0.05% significance level. Thus, activities ratio can be a proper index
in identifying debt payment and a good index for ranking credits of the companies.
H5 Test Results
H5 examined the relationship between variables of investment ratio and corporate credit. Since p-value
is below 0.05 (0.017), H5 is confirmed at 0.05% significance level. Thus, investment ratio can be a proper
index in identifying debt payment and a good index for ranking credits of the companies.
Results of Testing Main Hypothesis
Regarding high ability of Topsis technique, credit and bank ranking institutes can use model and ratios
of this study for credit ranking of loan applicants. Generally, using results of this study, credit ranking can be
conducted periodically to prevent from financial crises or bankruptcy or their consequences.
5. Conclusion
Analyzing financial statements has been revolved along with accounting progress and improvement of
economic conditions. Start of this discussion was at early 1960s when the ability of financial ratios in
predicting financial crises and bankruptcy were reconsidered. What makes these studies similar is
researchers attempt for offering models using some financial ratios in paying debts. Most offered methods in
these studies dont indicate superiority of a safe unit to another safe unit or an unsafe unit to another unsafe
unit. While the rank of each company from creditors view is very important since the less risky credit
applicants can be selected in this way. This study could identify companies with the highest rank regarding
the ability of paying debt in due time and ranked each score according to the calculated scores.
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Babic, P. and Plazibat, L. (1998). Ranking of Enterprises Based on Multicriteria Analysis. International
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Ertugrul, I., and Karakasoglu, N. (2007). Performance evaluation of Turkish cement firms with fuzzy
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Jegadeesh, N., and Titman, S. (1993). Return to buying winners and selling losers: Implication for stock
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Pitroski, J. (2000). Value investing: The use of historical financial statement information to separate winners
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