Innovating financial metrics for SME development: A factor-based analysis of Chinese enterprises

Abstract

This study investigates the role of innovative financial performance metrics in promoting the sustainable development of small and medium-sized enterprises (SMEs) in China. Responding to the limitations of single-indicator financial assessments, the research develops a composite Financial Performance Evaluation (FPE) index using factor analysis on ten key financial indicators across profitability, solvency, operational efficiency, and growth dimensions. Drawing on panel data from 82 listed SMEs over the period 2017–2022, the study applies a random-effects regression model to examine the impact of FPE on firm profitability, proxied by return on net profit (RON). The findings reveal a significant positive relationship between FPE and SME development, underscoring the strategic value of multidimensional financial evaluation in enhancing enterprise growth. The results are robust to alternative model specifications and endogeneity checks. This study advances financial diagnostics and offers actionable insights for policymakers, financial institutions, and SME managers. These insights can strengthen performance metrics to foster more inclusive and resilient enterprise development in emerging economies.