Financial Ratio Analysis as a Tool for Measuring Performance in an Industry
Chapter One
PURPOSE OF THE STUDY
The objectives of this research work are to assess or know the importance/usefulness of financial ratios as a tool for evaluating the performance of companies for investment decisions.
The research work will go or examine the indicators for investment in companies their earning performances, liquidity, and positive economic soundness. It will equally examine the indicators of strength, weakness, opportunity, and threat (SWOT) The management will take appropriate corrective actions to actions to improve the result when the weaknesses are identified. The identification of weaknesses and consequently improving the result will provide the investors the opportunity to know the propensity of the company to achieve progressive growth and equally make decisions for the investment.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Introduction
Gopinathan Thachappilly (2009), in this articles he discuss about the Financial Ratio Analysis for Performance evaluation. It analysis is typically done to make sense of the massive amount of numbers presented in company financial statements. It helps evaluate the performance of a company, so that investors can decide whether to invest in that company. Here we are looking at the different ratio categories in separate articles on different aspects of performance such as profitability ratios, liquidity ratios, debt ratios, performance ratios, investment evaluation ratios. James Clausen (2009), He state that the Profitability Ratio Analysis of Income Statement and Balance Sheet Ratio analysis of the income statement and balance sheet are used to measure company profit performance. He said the learn ratio analyses of the income statement and balance sheet. The income statement and balance sheet are two important reports that show the profit and net worth of the company. It analyses shows how the well the company is doing in terms of profits compared to sales. He also shows how well the assets are performing in terms of generating revenue. He defines the income statement shows the net profit of the company by subtracting expenses from gross profit (sales – cost of goods sold). Furthermore, the balance sheet lists the value of the assets, as well as liabilities. In simple terms, the main function of the balance sheet is to show the company‟s net worth by subtracting liabilities from assets. He said that the balance sheet does not report profits, there‟s an important relationship between assets and profit. The business owner normally has a lot of investment in the company‟s assets. Gopinathan Thachappilly (2009), He discuss about the Profitability Ratios Measure Margins and Returns such as gross, Operating, Pretax and Net Profits, ROA ratio, ROE ratio, ROCE ratio. However, he determines the Gross profit is the surplus generated by sales over cost of goods sold. He discussion about the Gross Profit Margin = Gross Profit/Net Sales or Revenue. Moreover, Operating profits are arrived at by deducting 10 marketing, administration and depreciation and R&D costs from the gross margin. Nonetheless, He explains about the operating profit margin. Operating Profit Margin = Operating Profit/Net Sales or Revenue. Nevertheless, pretax profits are computed by deducting non-operational expenses from operating profits and by adding non-operational revenues to it. Pretax Profit Margin = Pretax Profit/Net Sales or Revenue .Nonetheless, he also analysis about the net profit margin.Net Profit Margin = Net Profit/Net Sales or Revenue. He also explains that the returns on resources used dividend into three categories such as ROA, ROE, and ROCE: At first the Return on Assets = Net Profit/ (Total Assets at beginning of the period + Total Assets at the close of the period)/2) – The denominator is the average total assets employed during the year. Return on Equity = Net Profit/ (Shareholders’ Equity at the beginning of the year + Shareholders’ Equity at the close of the year)/2).ROCE ratio: Return on Capital Employed = Net Profit/ (Average Shareholders’ Equity + Average Debt Liabilities) – Debt Liabilities. Maria Zain ( 2008), in this articles he discuss abut the return on assets is an important percentage that shows the company‟s ability to use its assets to generate income. He said that a high percentage indicates that company‟s is doing a good utilizing the company‟s assets to generate income. He notices that the following formula is one method of calculating the return on assets percentage. Return on Assets = Net Profit/Total Assets. The net profit figure that should be used is the amount of income after all expenses, including taxes. He enounce that the low percentage could mean that the company may have difficulties meeting its debt obligations. He also short explains about the profit margin ratio – Operating Performance .He pronounces that the profit margin ratio is expressed as a percentage that shows the relationship between sales and profits. It is sometimes called the operating performance ratio because it‟s a good indication of operating efficiencies. The following is the formula for calculating the profit margin. Profit Margin = Net Profit/Net Sales. James Clausen (2009), in this article he barfly express about the liquidity ratio. He Pronounce that it is analysis of the financial statements is used to measure company performance. It also analyses of the income statement and balance sheet. Investors and lending institutions will often use ratio analyses of the financial statements to determine a 11 company‟s profitability and liquidity. If the ratios indicate poor performance, investors may be reluctant to invest. Therefore, the current ratio or working capital ratio, measures current assets against current liabilities. The current ratio measures the company‟s ability to pay back its short-term debt obligations with its current assets. He thinks a higher ratio indicates the company is better equipped to pay off short-term debt with current assets. Wherefore, the acid test ratio or quick ratio, measures quick assets against current liabilities. Quick assets are considered assets that can be quickly converted into cash. Generally they are current assets less inventory. Gopinathan Thachappilly(2009),he also state that the Liquidity Ratios help Good Financial .He know that a business has high profitability, it can face short-term financial problems and its funds are locked up in inventories and receivables not realizable for months. Any failure to meet these can damage its reputation and creditworthiness and in extreme cases even lead to bankruptcy.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to examine financial ration analysis as a tool for measuring performance in an industry.
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment, the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information on the study financial ratio analysis as a tool for measuring performance in an industry. 200 staff of Dangote group of company was selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to investigate the business of financial ratio as a tool for evaluating the performance of a company
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 financial ratio and organizational performance.
Summary
Ratio analysis and effective decision making, the study concluded that ratios analysis is a good way to evaluate the financial results of dangote group in order to measure its performance. Ratios allow the organization to compare its business against different standards using the figures on its financial statements. It is believed that investors and other users of financial reports by reducing the cost of investments and increasing the quality of the information provided. Therefore, rations are also important to managers because by publishing them, management can communicate with interested outside parties about its accomplishment. This research also concluded that the efficiency ratios in commercial banks indicate the usage of costs and expense in relation to the income of the organization, hence in relation to the data above, this study revealed that the usage of cost and expenses in period under study was efficiency or used well because of ratios analysis. From the ratios focused on, this study revealed that the asset quality ratios are among of the indicators of good performance during the period under study. The data also indicated the profitability ratios of, where profitability ratio is a measure of profitability, which is a way to measure a company’s performance. Finally, the researcher concluded that ratio analysis influence positively the effective decision making in dangote group of company.
Conclusion
The private sector of the Nigerian economy has been identified as the engine of growth for its rapid development. The ability of this sector to attract both local and foreign investment depends on their ability to provide high quality financial information on which investment decision can be based. The application of appropriate accounting standards in the preparation and presentation of the financial statements and auditing standards in reporting and computing financial ratios to interpret the financial statements is very crucial and useful for decision making.
Recommendations
Based on the foregoing, it is recommended that the Financial Reporting Council of Nigeria (FRCN) endeavors to issue high quality accounting standards which should be in compliance with relevant international accounting standard and international financial reporting standard. To ensure high quality standards and practicability of the same, exposure drafts should be circulated to those who will really apply the standard to make inputs before the final issue. It is also recommended that FRCN ensures that the computations of financial ratios are made compulsory and enforced on every manufacturing company in Nigeria to publish it with their financial statements annually.
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