I am working on a regression model that takes in features that are in the form of ratios.
For example, one of the ratios is:
Earnings ratio = company earnings / debt
The ranges for these figures are:
- company earnings: -infinity to infinity
- debt: 0 to infinity
- earnings ratio: -infinity to infinity
I have plotted below a chart which shows possible values of earnings ratio assuming "company earnings" is fixed at 100 while debt is changed (from 10 to 0.1) and similarly company earnings fixed at -100 while debt is changed
The issue I'm facing is that if the numerator is negative, the earnings ratio starts to INCREASE as denominator INCREASES. This becomes a problem for my regression model because for a company that is making losses (negative company earnings) and increasing debt, the ratio should decrease further for my linear model to train on
Is there any transformation that I can apply?
The way I see it, as debt approaches 0, the ratio should tend to positive infinity which is fine for positive numerator but not for negative numerator Also, the ratio should tend to -infinity as company earnings approach -infinity and debt approaches infinity.