An Empirical Study Into the Use of Financial Ratios as a Predictor of Business Failure. (a Case Study of Selected SMEs in Fct Abuja)

An Empirical Study Into the Use of Financial Ratios as a Predictor of Business Failure. (a Case Study of Selected SMEs in Fct Abuja)

CHAPTER ONE

OBJECTIVES OF THE STUDY

The Main Objective of the study is to proffer an empirical study into the use of financial ratios as a predictor of business failure. A case study of selected SMES in FCT Abuja; The specific objectives include:

To assess the relevance of financial ratios on business organizations.
To determine what are the various financial ratios used in small scale businesses.
To establish what ratios are the significant predictors of business failure.

CHAPTER TWO

REVIEW OF RELATED LITERATURE

INTRODUCTION

Financial ratios are mathematical equations derived from information presenting on a company’s financial statement. All financial ratios are used as indicators to reveal the financial health of the company, but some key ratios reveal a company’s strength more than others. They are represented in percentage or decimal format, which allows you to compare a company’s ratios to its competitors. Organizational leaders, investors and creditors should understand how to calculate key financial ratio and their importance in analyzing the financial pulse of a firm. Novinson (2008) is of the view that financial ratio analysis provide information on a company’s profitability, efficiency and ability to pay its bills. He adds that financial ratios are useful because the financial analyst can apply them to any business even if the financial analyst is not an expert in an industry. Nicholson (2006) says that many financial ratios are used to evaluate investments. Generally investors look to ratios to determine the profitability of a company and the value of its shares but financial ratios can also be used to evaluate operations, liquidity and leverage. Financial ratios are calculated measurements taken to analyze the economic welfare of a business. The ratios often compare financial statement data with stock market trading information for published traded companies. Financial ratios are important tool of economic decision making for all business (Lofi 2009). Okwuosa (2005) argues that ratios are used as a means of expressing these relationships. He adds that the act of ratio analysis lies first of all with determining the most appropriate ratio to be employed in a given circumstance. Nwoha (2006) sees ratio analysis as a tool for interpreting financial statement. He continues that it is a technique that compares certain related items in the financial statements to each other in a meaningful manner. It also provides insight into two important areas of management such as the return of investment made and the soundness of the company financial condition. According to Murray State University, financial ratios serve two purposes. First, the ratio over time gives you an idea of whether the company is growing or deteriorating financially. Secondly, financial ratio can be compared to standard ratios for that industry to determine how the company is functioning compared with other companies in that industry. Ugwuanyi (2004) opines that ratio analysis techniques investigate the firm performance through financial ratios. He adds that a ratio is used as a benchmark for evaluating the financial position and performance of a firm. Financial ratios are mostly frequently and widely used in practice to assess firms’ financial performance and condition. He says that over the past years, financial ratios have been objected to empirical analysis to find their other uses. This focus in empirical studies has been mostly on ascertaining the prediction power of financial ratios which have been investigated in the following areas: Corporate bankruptcy / Sickness, Credit Ratings, Acquisition/Mergers target and relationship of financial ratios to industry targets (Pandey, 2010).

CHAPTER THREE

RESEARCH METHODOLOGY

INTRODUCTION

In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.

RESEARCH DESIGN

Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.

POPULATION OF THE STUDY

According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.

This study was carried to examine an empirical study into the use of financial ratios as a predictor of business failure. selected SMES in FCT Abuja. forms the population of the study.

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

INTRODUCTION

This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.

TEST OF HYPOTHESIS

Ho₁: There is no significant effect of financial ratios as predictor of business failure.

Ho₁: there is no relevance of financial ratios on business organizations.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

Introduction

It is important to ascertain that the objective of this study was to ascertain an empirical study into the use of financial ratios as a predictor of business failure. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of an empirical study into the use of financial ratios as a predictor of business failure

Summary

This study was on an empirical study into the use of financial ratios as a predictor of business failure. Three objectives were raised which included: To assess the relevance of financial ratios on business organizations, to determine what are the various financial ratios used in small scale businesses and to establish what ratios are the significant predictors of business failure. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from selected SMES in FCT Abuja. Hypothesis was tested using Chi-Square statistical tool (SPSS).

Conclusion

From the result of data analysis and review of literature, ratio analysis is the benchmark for the evaluation of financial position and performance of a firm. Ratio analysis guides and leads the way of the users of financial statements. It also enables the management to know the financial strength and weakness in the system and also to be able to discover the root causes of the weakness and strength inherent in the system. It is a powerful and most dependable tool of financial analysis of a company. Ratio analysis helps in the summary of large quantity of financial data and to make qualitative judgment about the firms‟ financial performance. The relationship measured by ratio is an index that permits a qualitative judgment to be formed about the firms‟ ability to meet its current obligation and long- term obligation. Ratio analysis should be used by all organizations not just the small scale business, particularly the management develop the attitude of using financial statement. Also current data are should be used when dealing with financial ratio.

Recommendation

Financial ratio analysis should be properly appraised in the small scale businesses in order for the management to identify the strength and weakness inherent in the system.
The retained earnings of the small scale businesses should be properly invested in order to have more capital to expand their business.
Their financial statement should be more detailed in the presentation of facts for the management.
Financial analysis should be properly conducted in order for the company to get a correct financial statement figure at the end of the accounting periods.

References

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