Multi-Criteria Decision-Making for Financial Performance Evaluation

Multi-Criteria Decision-Making (MCDM) for financial performance evaluation brings together a spectrum of quantitative and qualitative measures to assess firms’ health, resilience and strategic positioning. Traditional single-metric approaches, such as return on equity or earnings per share, often fail to capture the multifaceted nature of corporate performance in volatile markets. MCDM frameworks enable analysts to integrate liquidity, solvency, efficiency and profitability ratios alongside market indicators and non-financial factors, such as sustainability commitments or governance scores. Recent advances emphasise hybrid models that combine objective weighting schemes with subjective expert judgements, fostering robust prioritisation of criteria and comprehensive ranking of alternatives. These methods address uncertainty and data heterogeneity through techniques like entropy‐based weighting, fuzzy logic for linguistic assessments and reference‐based normalisation for cross-company comparability. The result is a transparent, replicable process that informs stakeholders—from portfolio managers to regulatory bodies—on strategic allocation of capital, risk management and the alignment of financial goals with environmental, social and governance imperatives. Practical applications span industry sectors and geographies, from emerging markets to established exchanges, reflecting the global significance of rigorous, multi-dimensional performance appraisal.

Research from Nature Portfolio

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Research from all publishers

A hybrid MEREC–RBNAR method has been proposed to appraise companies listed in a major sustainability index by computing criterion weights via Removal Effects of Criteria and ranking alternatives through Reference-Based Normalization. Applied to a case study of firms in a prominent stock exchange, the approach integrates five core financial ratios and demonstrates that return on equity emerges as the most critical driver of performance among sustainability-focused entities.

Another study adopts the Full Consistency Method (FUCOM) to derive weights for financial and market criteria based on expert judgements, then employs nine complementary MCDM techniques to rank firms in a leading sustainability index. Consensus is achieved through the Copeland aggregation, while extensive weight simulation validates the robustness of current ratio as the dominant factor, reinforcing the framework’s applicability to diverse market settings.

An integrated entropy–fuzzy TOPSIS model has been developed to evaluate companies in a major international index by capturing uncertainty with fuzzy sets and deriving objective weights from data entropy. Analysis of key liquidity, solvency, efficiency and profitability measures reveals that return on equity and debt-to-equity ratios exert the greatest influence. The model’s portfolio selection capability is confirmed through comparison with a mean-variance benchmark, yielding superior risk-adjusted returns.

Multi-Criteria Decision-Making for Financial Performance Evaluation publication trend

The graph below shows the total number of articles in multi-criteria decision-making for financial performance evaluation across all publications each year (not limited to Nature Index journals).

Technical terms

Multi-Criteria Decision-Making (MCDM): A framework for evaluating alternatives against multiple quantitative and qualitative criteria simultaneously.

TOPSIS: Technique for Order of Preference by Similarity to Ideal Solution; a ranking method comparing alternatives based on their distance from an ideal and an anti-ideal solution.

VIKOR: A compromise-oriented method that identifies solutions offering maximum group utility and minimum individual regret.

Entropy Method: An objective weighting technique that derives criteria weights from the variability of data.

MEREC: Method Based on the Removal Effects of Criteria; a weight-determination approach assessing the impact of excluding each criterion.

RBNAR: Reference-Based Normalization Alternative Ranking; a normalisation procedure that benchmarks alternatives against reference values.

FUCOM: Full Consistency Method; an approach for deriving criteria weights through pairwise comparisons ensuring logical coherence.

References

1. Enhancing Financial Performance Evaluation: The MEREC-RBNAR Hybrid Method for Sustainability-Indexed Companies. Journal of Soft Computing and Decision Analytics (2024).
2. Determining the financial performance of the firms in the Borsa Istanbul sustainability index: integrating multi criteria decision making methods with simulation. Financial Innovation (2024).
3. Decision Analysis on the Financial Performance of Companies Using Integrated Entropy-Fuzzy TOPSIS Model. Mathematics (2023).