CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The impact of financial ratios on the performance of a business organization is becoming more apparent to users of financial statement.
Business’s performancecan be monitored with tools called financial ratios which help to interpret financial information about the company. According to Ofoegbu (2003), the more you know about how your business is performing, the easier it will be for you to make informed decisions about how to manage and grow your business.
Accounting ratios are widely used for modeling purposes both by practitioners and researchers. The firm involves many interested parties, like the owners, management, personnel, customers, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement analysis in their evaluations. Practitioners use financial ratios, for instance, to forecast the future success of companies, while the researchers' main interest has been to develop models exploiting these ratios.
In the past decade of economic tendency, Nigeria as one of the developing countries in the world has confronted various changes and enlargement. Achievements of Nigeriaindustries deeply affect the economic status of Nigeria. “The movement of foreign exchange has increased rapidly as investors began to be involved more and more in it”(Aborode, 2006).
Meanwhile, investors will want to invest majorlyin good conduct industries because they want to earn revenue in the short time period. However, investors need to analyze the performance of the companies properly before invest.
By doing the accounting ratios analysis, it will help them to understand the performance of any company. The analysis of financial ratios is a study of establishing meaningful relationship between various financial facts and figures given in financial statement. The basic financial statement included balance sheet and income statement which is the indicating device of profitability and financial soundness of business concern. Thus, analysis of accounting ratio is the procedure of establishing and identifying the financial weakness and strengths of the company.
Accounting ratios analysis has been view as a primary technique of the analysis of financial statement from various aspects of business. (Brigham & Houston, 2004) state” Ratio Analysis involves comparisons. A company’s ratios are compared with those of other firms in the same industry, that is, to industry average figures.” Ratio refers to the relationship expressed in mathematical term among a set of numeral and two individual links with each other in logical way. It is based on the assumptions that single figure may not tell any useful information but when expressed relative to another figure, it will definitely give some meaningful information. Since ratio is a mathematical relationship between two or above accounting figures, it can be expressed in as a pure ratio, as a rate of times or as a percentage. The relationship between two and above accounting figures or group is called financial ratio. Financial ratios may be calculated in different ways, using different figures (Gibson and Cassar, 2005). Financial ratios help to outline a large volume of financial data into a concise form so it is easy to interpret and conclude the performance and position of a firm.
Accounting ratios is a useful tool for management to making decision. By using ratio analysis, it helps management to evaluate the firm performance such as financial health, profitability and operational efficiency over a period of time by comparing the present ratios with the past ratios and comparing with other companies also so as to see where the company stands in the industry. In another way, by setting a trend with the help of ratio, management can know whether the firm financial position is improving, falling or constant over the years. Through the direction of the trend of strategic ratio, it is helpful for management in the function of planning, forecasting and controlling.
1.2 Statement of the Problem
While financial ratio is referred to as a basic tool and a general yardstick for evaluating organization’s performance, there are so many factors which basically militate against the usage of financial ratio and hence reduce its potency in the determination of an organization’s actual performance. Some of these factors are:
i. Manipulation of accounting figures in order to suite potential investorsgiving rise to misleading financial report.
ii. Many organizations fail to appreciate the impact of financial ratio analysis on investment decision in such organization
iii. Many organizations disclose information in the financial statements that is inadequate to support good decision making
iv. Many companies do not comply strictly with the principles that govern analysis of financial ratio
All these are factors which may mar the usage of financial ratio in the evaluation of an organization’s performance. Having highlighted the factors and other investors in ensuring and assuring maximum returns from investment decision? How do management and other users go about calculating these ratios with the aim of deriving the most suitable answer that will enable them to make the best investment decision with their limited resources? These are the questions this research shall endeavour to answer.
1.3 Aim and Objectives of the Study
The purpose of the study is to assess the impact of financial ratio on the organization performance with particular emphasis on UAC Nigeria plc. Other objectives of the study include:
i. Examining how accounting figure are handled and haw that affects the financial reports of the three company under review.
ii. Examining how accounting ratios has influenced investment decision in these organizations
iii. To ascertain the profitability trend of the organization given its level of investment and turnover using accounting ratios.
iv. To assess the performance measurement policy of the company under review.
1.4 Relevant Research Questions
i. How is accounting figure handled and how does that affect the financial reports of the company under review?
ii. How has financial ratio influenced investment decision in these organizations?
iii. What is the profitability trend of this organization given their level of investment and turnover using accounting ratios
iv. What is the performance measurement policy of the company under review?
1.5 Statements of hypotheses
For the purpose of this study, the following hypothesis will be tested using spearman’s rank correlation
Hypothesis I:
H0: There is nosignificant relationship between accounting ratioanalysis and measurement of organization’s performance
H1: There is significant relationship between accounting ratio analysis and measurement of organization’s performance
1.6 Significance of the Study
The importance of using the accounting ratios methods in the UAC Nigeria plc is represented by providing the appropriate and accurate information to know the reasons of the deviations and then to evaluate the company’s performance .
This study gives insight into the various ways that financial ratio analysis can help improve organizations performance and how the financial performance of organizations in Nigeria can be properly assessed in order to attract investors. The study will also go a long way in showing the various accounting techniques that managers can adopt in measuring financial performances, and its implications on the financial position of the organizations.
The findings and recommendations of the researcher will help in building a strong and better accounting practices that will help in the assessment of organizations performance in Nigeria, if taken seriously by government and the general public. It may serve as a reference to other researchers who may want to research into the field.
1.7 Scope of the Study
The overall scope of the study is highly restricted to the assessment the financial performances of UAC Nigeria plc for the periods 2003, 2004,
2005, 2006, 2007, 2008, 2009, 2010, 2011 and 2012. These companies were chosen because it is near to the researcher hence gathering of information would be easy. The above periods were also chosen because; the researcher wants to assess the more recent financial performance of the company under study.
1.8 Definition of Terms
Liquidity Ratios: This is measurement of how readily a company can meet its obligations.
Profitability Ratios: This gives an indication of the earnings and
profitability potential of a company.
Asset Management Ratios: This gauge how efficiently a company can
change assets into sales.
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