The Effect of Ratio Analysis in Investment Decision
Chapter One
OBJECTIVES OF THE STUDY
In consideration of the problems identified above, the objective of this research include.
- To show how ratio analysis facilitates proper understanding of information contained in financial statements.
- To show how ratio analysis aids Investment decision.
- To examine the techniques used in analysis financial statements.
- To identify the usefulness of financial ratios in measuring and predicting the performance and financial position of a business.
- To unravel the obstacles to the proper use of financial ratios in Investment decision.
- To suggest on ways to enhance efficient use of ratio analysis in decision-making.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
One of the effective ways of communicating financial information about a business is through financial statements. Thus, the recording and summarizing of financial data are necessary part of accounting information system.
However, no matter how well prepared and presented, financial statements need to be analyzed and interpreted to unveil the truths hidden in them and enhance decision-making. Interestingly, such analysis and interpretation can be made by means of ratios and comparisons.
Therefore, in the this chapter, expert opinion on the role ratio analysis in Investment decision with particular reference to financial statement analysis are reviewed
FINANCIAL STATEMENT ANALYSIS
According to Hermanson et al (1992:824), “financial statement analysis consist of applying analysis tools and techniques to financial statements and other relevant data to show important relationships and obtain useful information.” Therefore, financial statement analysis can be defined as the breaking down, interpretation, and translation of data contained in financial statements to provide information and show important relationships among the items of financial statements and drawing conclusion about the past performance, current financial position, and future potentials of a business.
PARTIES INTERESTED IN FINANCIAL STATEMENT ANALYSIS
With particular reference to business organizations, parties interested in financial statement analysis are divided into two categories, namely: internal users and external users.
The internal users include management and employees of an organization, while external include shareholders, investors, creditors, debenture/bond holders, financial analysis, etc.
Management and Employees
Financial statement analysis helps management and employees to know the operating results, financial position and future potentials of a business.
Shareholders/Owners
The analysis helps shareholders or owners of a business to ascertain the profitability of the operation of the business, as well as return on their investments.
Investors and Creditors
Financial statement analysis helps investors to know the profitability and return on investment in a business. In the other hand, it helps trade creditors and note holders to know the liquidity or the ability of a business to pay its debts when they fall due.
Debenture/bond holders
Those who lend money to the business would like to know the ability of the business to repay on maturity both the interests and the principal of the loans granted to it.
Financial analysis
Financial statement analysis enables financial analysis to offer professional advice to their clients on investments.
OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS
According to Needles et al. (1996:770) financial statement analysis is used to achieve two basic objectives: (1) Assessment of past performance and current position, and (2) Assessment future potential and related risks of a business.
Assessment Of Past Performance And Current Position
Financial statement analysis helps in assessing or judging the past performance of a business by taking a look at the trend or historical sales, expenses, net income cash flow, and return on investment. Also an analysis of current position will tell for example, what assets the business owns and what liabilities must be paid.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
This chapter describes the methods and procedures used in geothermic data that was analyzed in chapter four, necessary to accomplish the purpose of this study. The research methodology is vital part of the research report because according to Osuala (1987:32), it is the background against which the reader evaluates the findings and the contusions.
RESEARCH DESIGN
This study is a surrey designed to find out the role of ratio analysis in Investment decision; it is descriptive and analytical in nature.
DATA COLLECTION TECHNIQUE
The two main sources of data collection used in the study are the primary and the secondary sources.
PRIMARY SOURCES
Primary sources of data collection are first hand information i.e. information that was gathered by the researcher himself directly from the respondents. In this regains, questionnaire and oral interviews were used to collect the requisite data from the respondents the management staff and non-management staff of the organization under study.
SECONDARY SOURCES
Secondary sources of data collection are information’s that were obtained from published maternal such text books, journals, magazines, newspapers, articles, and so on, which were considered necessary for the purpose of this research. They were the major sources from which the knowledge and opinions of experts in the subject from which the.
POPULATION
According to Nsini et al. (2000:20), population is any theoretically specified aggregation of items, elements or things with common characteristics or interest.
The population of the study is 27 members of the management and staff of First Bank Nigeria Plc(Nig) Aba, Abia state. it cores all the departments of sales and marketing, the purchase and supply department, the administration and personnel department and the finance and accounts department. All the is staff of these departments are further grouped into two groups namely; management staff and Non management staff.
The management staff comprises of administration and personnel department, and the finance and accounts departments. While the Non-management staff comprises of the sales and marketing department, and purchasing and supply department.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
INTRODUCTION
In every research study, the method of presentation and analysis of data is paramount to the extent that it determines the validity of such data been tested.
Therefore, in this chapter, the researcher has been able to present and analyze data using questionnaire as specified in chapter three.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
INTRODUCTION
This chapter concludes the project. It contains the summary of the research findings, the conclusion, and the recommendations offered by the researcher based on the findings.
SUMMARY AND DISCUSSION OF FINDINGS
With particular reference to the organization under study as well as the literature review, the research are summarize and discussed as follows:
- Ration analysis facilitates proper understanding of information continued in financial statements and aids Investment decision. According to Essien (2006:11), “financial statements carry lots of financial statements become more useful when they are related each other or to some other relevant financial data by means of rations.”
- Financial rations are useful in evaluating and predicting the performance and financial position of a business, as well as identifying areas that need improvement. Norbert f. Lindsborg of Harold Washington college (in Dansby et al, 2000: 181) observed: “ As an investor in a corporation or as owner or manger of a business, you are naturally interested in knowing how well the firm is doing financially. You will want to compare this year’s is available to pay bills in the near future.
- despite the obstacles to the proper use of financial ratios, there are helpful suggestions on ways to enhance efficient use of ratio analysis in decision-making. According to Lasher (1997:69,82); “although ratio analysis is a powerful tool, it has some significant shortcomings. Analysis have to be careful not to apply the techniques blindly to any set of statements they come across, due to differences in business and accounting methods.
Hermason et al. (1992:846), “financial analysis relies heavily on informed judgment. Percentages and rations are guides to aid comparison and useful in uncovering potential strengths and weaknesses. However, the financial analysis should seek the basic causes behind and established trends”.
- Financial rations need to be carefully computers and used with the right yardsticks of comparison in order to of optimal benefit to the users. In this regard, Omuya (1983:456), “Interpretation of a change in a ratio needs careful examination of changes in both numerator and denominator. Without very full and detailed investigation some wrong conclusion can as drawn.”
RECOMMENDATIONS
With reference to the findings of the study, the researcher recommends the following:
- Users of financial statements need to have at least, a fair knowledge of accounting so as to enable then understand and appreciate accounting information.
- Prospective investors should properly analyze the financial statements of companies before deciding to invest in the companies.
- Users of financial statement who are not knowledgeable enough to analyze or understand the information contained in them should seek the services of qualified financial analysts, accountants, stockbrokers, bankers, etc.
- In view of the remarkable influence which accounting informations have on the decisions of the users, it is pertinent that only qualified and honest persons should and audit financial statements.
- Financial rations should be used with careful examination and proper understanding of the meaning, implication and effect of the actual figures shown in financial statements, in order to avoid making wrong judgments, conclusions and decision.
- financial ratios should be judiciously used by firms, investors, lenders, shareholders, managers, and other stakeholders, in view of their numerous benefits and limitations.
CONCLUSION
Financial statements contain lots of information summarized in figures. Viewed on the surface, they do not provide enough information about the viability of the reporting entity. Thus, they need to be analyzed by means of financial ratios to unravel the mass of truth hidden in them, and to enhance decision-making.
Ratio analysis helps to reveal, compare and interpret salient features of financial statements. When applied to a set of financial statements, financial ratios highlight significant aspects of the financial position and operational results of a business requiring further investigation. They help to identify the strengths and weaknesses of a business.
In fact, ratio analysis helps to evaluate the past performance, the present condition, and the future prospects of a business. It enables us to ask the right questions about a business, and paves way to finding the useful answers. Such analysis therefore, aids planning, control, forecasting and decision- making.
BIBLIOGRAPHY
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- Bittel, lester R, Ronald s. Burke and Lawrence R. Lanf orge. (1984). An Introduction to business: Business in Action 2nd ed. New York: Mc Graw Hill Book company.
- Dansby, Robert l., Burton s. Kaliski, annd Michael D. Lawrence. (2000). Paracligin college Accounting. 4th ed. st paul,mN: paradigm publishing Inc.
- Essien, Enefiok E. (2006). Entrepreneurship concept and practice, uyo: Abaem publishing co.
