Pan-European comparables searches : enhancing comparability using diagnostic ratios

This article discusses the use of financial ratios (or diagnostic ratios) in the context of identifying comparable companies for transfer pricing purposes, with the aim of addressing a number of issues that require further guidance in the process of developing a harmonized approach to comparables searches from a pan-European perspective. A general background is provided as to how diagnostic ratios can be applied in the quantitative screening phase of a comparables search. The use of diagnostic ratios in the quantitative screening phase, as opposed to the use of adjustments to a final set of comparable companies, is briefly discussed. A number of technical issues and best practices related to the application of diagnostic ratios are also considered.