Impact of Financial Ratio Analysis on Investment Decision
Chapter One
OBJECTIVE OF THE STUDY
The general purpose of this study is to examine and analysis the impact of financial ratio analysis on investment decision in a multinational organization (GUINNESS NIGERIA PLC). These are:
- To examine the commitment of resources with the expectation of realizing future benefit over a reasonable long period in the future.
- To determine how matters relating to dividend policy affect the organization stability.
- To examine how Investment decision affect the future profitability either by way of increase in revenue or cause an increase in efficiency and reduction in cost.
- To examine” the factors that determines the growth and survival of the organization over-time
- To make recommendation to the management, shareholders and investors on how to execute their investment plans.
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). Ratio analysis is the most important device for interpreting the performances of companies from their financial statement (ICAN 2006). Dave (2012) defines profitability as an ability to make profit from all the business activities of an organization, company, firm, or an enterprise. It shows how efficiently the management can make profit by using all the resources available in the market. Profitability is also the ability of a given investment to earn a return from its use. However, the term “profitability” is an index of efficiency and management guide to greater efficiency. Although profitability is an important yard stick for measuring the efficiency and conversely, a proper degree of efficiency can be accompanied by an absence of profit. The net profit figure simply reveals a satisfactory balance between the values received and the values given. The change in operational efficiency is march one of the factors on which profitable of an enterprise largely depends. Moreover there are many other factors besides efficiency which affect the profitability. Carole (2012) says profitability means that the revenue exceeds the expenses of the business; this is different from comparing assets and liabilities on a balance sheet to determine financial position. A profitable business may be in a weak financial position and a business with a strong financial position may not be profitable. He adds that it must be evaluated on both a long term and a short term basis because business goals and decision may differ depending on the time frame used. To look at whether an enterprise is generally profitable in typical or average years, the most frequently used tool is the enterprise budget. The enterprise budget compares arrival cost and returns for a business using average values for some period of time. It gives a general idea of profitability over the period of time for a typical set of costs, price, yields and feed conversion ratios.
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 impact of financial ratio analysis on investment decision
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 impact of financial ratio analysis on investment decision. 200 staff of GUINNESS NIGERIA PIc located in Ikeja 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 on impact of financial ratio analysis on investment decision. 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 analysis on investment decision
Summary
This study was on impact of financial ratio analysis on investment decision. Four objectives were raised which included: To examine the commitment of resources with the expectation of realizing future benefit over a reasonable long period in the future, to determine how matters relating to dividend policy affect the organization stability, to examine how Investment decision affect the future profitability either by way of increase in revenue or cause an increase in efficiency and reduction in cost, to examine” the factors that determines the growth and survival of the organization over-time and to make recommendation to the management, shareholders and investors on how to execute their investment plans.. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of GUINNESS NIGERIA PLC. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made accountants, human resource managers, customer care officers and marketers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
The study revealed that positive and significant relationship exists between accounting ratios in enhancing the liquidity position of an organization. There is also significant and positive relationship between accounting ratios in contributing to the operational efficiency of management in an organization. To conclude, accounting ratios are necessary for proper investment decisions in corporate organizations.
Recommendation
- Never base conclusion on one ratio. Several ratios should be examined before conclusion is made.
- Non-recurring and extra-ordinary items whether profit or loss should be eliminated when computing ratios.
- Interpret results according to the general business conditions. Double profit might be an impressive performance but not when others are tripling their profits.
- The general effect of inflation requires consideration in financial analysis.
References
- Fadeyi, L.A. (2011). Practice and Management of Investment in Nigeria. Lagos: Asla Publishers Ltd.
- Ishola, K.A. (2012). Foundations in Accounting for Tertiary Institutions. Ilorin: Lavgark Nigeria Publishers.
- Okezie, B.N. (2010). Financial Accounting. Owerri: Bon Publications Ltd.
- Olaegbe, B.A. (2012). Fundamentals of Feasibility Study. Lagos: Olas Publishers.
- Omamu, L.A. (2011). Financial Accounting. Lagos: Hunters Publishers.
- Abdulrahman, T. (2011). Evaluating Performance of Islamic Banks By Using Financial Analysis Composite: A Comparative Study of the Iraqi Islamic Bank Performance with the Jordan Islamic Bank for the Period (2000-2008). Journal of Kerkuk University for Administrative and Economic Sciences, 2(1), 152-171. [2]
- Abiola, B. (2013). Financial Ratio Analysis of Firms: A Tool for Decision Making. International Journal of Management Sciences, 1(4), 132-137. [3]
- Ali,F.& Akram,A. (2011). A Comparison of Financial Performance in Investment Banking Sector in Pakistan. International Journal of Business and Social Science, 2( 9 ), 17-19. [4]
