Financial Ratio Analysis As An Important Tool For Evaluating The Performance Of Business Organization (Accounting Project)

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BACKGROUND TO THE STUDY An  introduction to financial rate analysis by Micheal C Dennis MBA, CBF. Financial  ratio analysis is a useful techniques to measure compare, and evaluate the financial condition and performance of a customer. Rate analysis enable a credit manager to trends in a customers financial performance, and to compare its performance and financial condition with the average performance of similar business in the same industry.

 

TABLE OF CONTENT

Title Page

Certification

Dedication

Acknowledgement

Table of content

CHAPTER ONE: INTRODUCTION

1.1      Background to the Study

1.2      Statement of the Problem

1.3      Justification of the Study

1.4      Objective of the Study

1.5      Significance of the Study

1.6      Scope and Limitation of the Study

1.7      Definition of Terms

CHAPTER TWO: LITERATURE REVIEW

2.1 General Overview of the Study

2.2 Content of Financial Statement

2.3 Nature of Financial Ratios Analysis

2.4 Different Types of Ratios and their Usage

2.5 Users of Financial Ratios Analysis

2.6 Importance of Financial Ratio to Users

2.7 Limitation of Financial Ratio to Users

CHAPTER THREE: RESEARCH METHODOLOGY

3.0 Research Methodology

3.1 Profile of Unipetrol Nigeria plc

3.2 Sources of Data

3.3 Method of Data Analysis

CHAPTER FOUR:

4.1 Introduction

4.2 Analysis and Interpretation of Data

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary

5.2 conclusions

5.3 Recommendations

References

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND TO THE STUDY

An  introduction to financial rate analysis by Micheal C Dennis MBA, CBF. Financial  ratio analysis is a useful techniques to measure compare, and evaluate the financial condition and performance of a customer. Rate analysis enable a credit manager to trends in a customers financial performance, and to compare its performance and financial condition with the average performance of similar business in the same industry.

Balance sheet ratios measure liquidity and solvency (a business ability to pay its bills are they due) and leverage (the extent to which the business is dependent’s. Financial ratio is used by credit professional to answer this question about customer

–  Is the business profitable

–  Can the business pay its bills on time?

–  How does the customers performers compare with its competitor?

–  How does the customer performance compare to the industry

–  Financial ratio analysis is a useful tool for determining a customer overall financial condition. Industry wide financial ratios published by a variety of sources, including Dur & Bradsheee.

Finical ratio are useful for making quick comparisons. Banks and trade creditor a business is a good credit risk or not. Ratio analysis is a tool to help evaluate the overall financial condition of a customer’s business. Ratios are useful for making comparisons between a customer and other business in an industry.

A financial ration is a sample mathematical comparison of two or more entries from a company’s financial statement creditor use ratios to chat a company’s progress, uncover trends and point to potential problem areas.

–  Accounting ratio

–  Valve added statement

–  The focus statement

–  Experiences

The focus of this research s based on accounting ratio because it is the most powerful and commonly of all the tools. Accounting ratio is a proportion or fraction or percentage expressing the relationship between one item in a set of financial statement and another in the same financial statement ( Igben, 1999)

However, ratio can be classified into two namely

1. According to origin
2. According to usage

ACCOUNTING TO ORIGIN: Under this, we have profit and loss ratio, balance sheet ratio and combine ratio. Profit and loss ratio or balance sheet ratio is a situation where two figure are taken from profit and loss or balnce sheet only. Which so ever the case may be while the combine ratio is a situation whereby the two figures are taken from profit and loss and balance sheet respectively.

ACCORDING TO USAGE: Here, the specific area of interest of the users is used to classify various types of ratio. Five categories can be calculated in view of requirement of users

1.PROFITABILITY RATION: It is used to measure the operating efficiency of the company in terms of profit.

2. ACTIVITY RATIO:It is used to evaluate the efficiency with which the firm manages and utilizes it assets.
3. LEVERAGE RATIO:I is used to measure the risk and ability of the firm in using debt to shareholder advantage
4. LIQUIDITY RATIO:It is used to measure the firm’s ability to meet current obligation.

A single calculation ratio on itself foes not indicate favorable or unfavorable condition, it can be greatly enhance when

1. TREND ANALYSIS IS USED: Ratio calculate regularly  and consistencies bases, the present figure will be compared with past or previous figures. When this is done, changes will be  highlighted and reflect whether the firm’s financial position and performance has improved or deteriorated
2. CROSS- SECTION ANALYSIS IS DONE: Ratio been calculated for an individual firm being other firms in the same industry

1.2     

            PROBLEMS IN FINANCIAL STATEMENT ANALYSIS
Financial statement analysis can be a very useful tool for understanding of firm’s performance and condition. However, there are certain problem and issues encountered in such analysis which call for care, circumspection and judgment. The problems are as follow:

1. LACK OF AN UNDERLYING THEORY:The basic problem in financial statement analysis is that there is no theories that tell us which numbers to look at and how to interpret them. In the observe of an underling theory financial statement analysis appears to be informal and subjective from a negative view point the most striking g aspects of ratio analysis is the absence of an explicit theoretical structures.

2. CONGLOMERATE FIRMS: Many firms, particularly the large ones have operations spanning a wide range of industries. Give the diversity of their product lines; it is difficult to find suitable benchmark for evaluating their financial performance and condition. Hence, it appears that meaningful benchmark   may be available only for firms which have a well defined industry classification

3. WINDOW DRESSING: Firms may result to window dressing to project a favorable financial picture for example a firm may prepare it balance sheet at a point when its inventory level is very low. As a result it may appear that the firm has a very comfortable liquidity position and a high turnover of inventories when window dressing of this kind is suspected, the financial analysis should look at the average level of inventory over a period of time and not the level of inventory at just one point or time.

4. VARIATION IN ACCOUNTING POLICIES: Business firms have some latitude in the accounting treatment of items like depreciation, valuation of stocks, research and development expenses, foreign exchange transaction installment sales, preliminary and pre-operative expenses, provision of reserves, and revaluation of assets due to diversity of accounting policies found in practice.

5. INTERPRETATION OF RESULTS: Through industry average and other yardsticks are commonly used in financial ratios, it is somewhat difficult to judge whether a certain ratio is good or bad. A high current ratio, for example may indicate a strong liquidity position (something good) or excessive inventors (something bad). Likewise a high turnover of fixed asset may efficient utilization of plant and machinery or continued flogging of more or less fully depreciated suborn, out and inefficient plant and machinery.

Another problem in interpretation arises when a firm has some favorable ratio and some unfavorable ratio this is rather common. In such a situation, it may be somewhat difficult to form an overall judgment about its financial strength or weakness. Multiple discriminated analysis, a statically tool, may be employed to sort out the net effect of several ratios pointing in different direction.

6. CORRECTION AMONG RATIOS: Notwithstanding the previous observation financial ratio of a firm often show a high degree of correction. This is because several ratio have some common element (sale for example, is used in various turnover ratio) and several items tend to move in harmony because of some common underlay factor.

–  Will the analysis of the financial statement be important to the general public and prospective investor?

–  What will be the effect of ratio analysis on the future prospect of a business organization?

1.3   JUSTIFICATION FOR THE STUDY
Although there have been empirical studies on ratio analysis the financial statement, for example BAMIGBOYE 2003, AGESSE 2007 and EDH 2002 research Work failed to analyze investors ratio which will be great important to investors and potential investor and their research work also failed to analyze the limitation and importance of financial ratio analysis and this work put all these into consideration.

1.4  OBJECTIVE OF THE STUDY

The objectives of the study are to analyze the need for performance evaluation in a business organization. Other objectives include:

1    To measure the strength, weaknesses, opportunities and threats facing the organization using ratio analysis as an invaluable aid to managements.

2    To provide information that will assist existing and potential investors to utilize their funds judiciously from the analysis of financial statement

3    Make policy recommendation based on the observed finding from the study.

1.5 SIGNIFICANCE OF THE ANALYSIS

1. SIMPLIFIES ACCOUNTING FIQURES: The most significant objective of ratio  analysis  is that simplifies the accounting figures in much easier way by which anyone can be understood it quite essay even for those who do know the language of accounting

2. MEASURE LIQUIDITY POSITION: Liquidity position of a fun is said to be satisfactory it is able to meet its current obligations as an when they mature.

3. FACILITIES INTER-FIRM AND INTRA-FIRM COMPARISON:  ratio analysis is the basic form of company the efficiency of various firms in the industry and various division of a firm. Absolute figures are not suitable for this purpose, but according ratios are the best   tools for inter firm and inter firm comparison.

4. TREND ANALYSIS: Trend analysis of ratio revisable whether financial  position of the firms is improving or deteriorating over years because it enable a firms to take the time dimension into account  with the help of  such analysis one can ascertain whether the trend may be increasing

5. MEASURES OPERATION EFFICIENCY: Ratio is useful tools in the hands of management to evaluate the firm’s performance over a period of time by comparing the present ratios with the past ratios. Various activity or turnover ratios measure the operation efficiency of the firm. These ratio  are used on general by the banker, investors and other suppliers of credit.

1.6 SCOPE AND LIMITATION OF THE STUDY

This research work essentially deals with ratio analysis, which is a tool for evaluating company’s performance. This study is restricted to unipetrol Nigeria plc (new oando petrol) by adopting intra-company analysis which involves the analysis of performance within a business organization and this research work did not go be young using ratio analysis   which is coated within a year financial period (2006).

A year financial statement is used due to the change in name of the organization. That is,, changing from unipetrol Nigeria plc Oando petroleum Nigeria  plc.

1.7   DEFINITION OF TERMS

RATIO: simply means one number that is expressed in terms of another number to show the relationship between the two numbers (Jennings, 1993:40)

FINACIAL STATEMENT: Is a formal record of business activities over a period of time which offer a means by which manage document their progress in meeting organization goal ( Gitma 1992:65)

SHAREHOLDER: They are equally owner of a company, a person who own stock in a company and who shall be entitled to divided declared data the end of the accounting period

ASSETS: This refers to that economic resource that is expended to be of benefits to the future. This assets are usually only by the business organization which are used to generate cash flows. These include fixed assets such as  plant and machinery  and current assets such as inventories

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