THE IMPACT OF FINANCIAL RATIO ON INVESTMENT DECISION ORGANIZATIONS
Financial analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing relationships between the items on the balance sheet and The Trading and profit and loss account.
The principal tools in financial analysis are the ratio analysis. Ratio analysis is an important tool for financial manager and most important in investment. It enabling the analyst to highlight the existing strengths and weakness of the company as contained in its financial statement. The strengths must be understood if they are to be used to proper advantages and the weakness must be recognized if corrective action is to be taken.
Ratios are highly important profit tools in financial analysis that help financial analysts to implement plans that improve profitability, liquidity, financial structure, reordering, leverage and interest coverage. Although ratios report mostly on past performances. They can be predictive too, and provide lead indications of potential problems areas.
Ratio analysis is primarily used to compare a company’s financial figures over a period of time, a method sometimes called trend analysis through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly, you can also see how your ratios stack up against other businesses both in and out of your industry.
There are several consideration which must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies.
- If you are making a comparative analysis of a company’s financial statements over a certain period of time, make an appropriate allowance for any changes in accounting polices that occurred during the same time span.
- When comparing your business with others in your industry, allow for any material differences in accounting policies between your company and industry norms.
- When comparing ratios from various fiscal periods or companies inquire about the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures.
- Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement. Such as non-recurring items and inventory or pro-forma adjustments. In many cases, these adjustments can significantly affect the ratios.
- Carefully examine any departures from industry norms.
1.1. BACKGROUND OF THE STUDY
This study arises as a result of the problems being encountered by investors in taking investment, decision and usefulness of ratio.
Most often, investors who have funds to invest are in a fixed on how to go about it, The Average financial manager apart from receiving dividend, is unaware of other benefits accruable to him by investing widely. In fact, before a rational investors and financial manager can make any investment decision at all, he must decide on the objective trying to achieve.
Objective can be set only once certain characteristics of the investors are known, these characteristic include their required risk and return, details of their existing wealth, tax position liquidity requirements and future liabilities.
Until recently, the approach of investment advises have been concentrated more on the characteristics of the securities (shares) or market they are investing in rather than on the characteristics of their clients.
Having recognized the problems of investors in their decision making on when, how and where to invest, then the important tools for investment will be considered to give the prescription, which will result in the wealth vigour and greater happiness to the investors.
1.2 STATEMENT OF THE PROBLEM
This study is to determine the impact of financial ratios as tools for investment decision. The pricing of stock in the Nigerian Capital market is a continuous issue.
Investor cannot really determine which factors are imminent in the determination of ordinary share price.
Ratio analysis is the core of financial statement interpretation. Indeed, to many, interpretation of financial statement is synonymous with ratio analysis. From the on set, we must realize that ratios are of little use on their own. As comparative parameters they also need to be compared to some of standard targets or related items before reliable inferences may be made.
There is therefore the needs to establish empirically the extent of influence of which certain economic and company related variable influences the investment decisions.
In trying to establish the impact of financial ratio for investment decision, the researcher will try as much as possible to examine the ratios and evaluate them.
1.3 RESEARCH HYPOTHESIS
Based on the above problems, the following working hypothesis are formulated.
i Ho:- Represent the null hypothesis
Hi:- Represent the alternative hypothesis
Ho:- That the management uses ratio analysis to determine the firm’s financial strength and weakness and accordingly takes action to improve the firm’s position.
Hi:- That the management does not use ratio analysis to determine the firm’s financial strength and weakness and accordingly take action to improve the firm’s position.
- Ho:- That ratio are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity financial structure, reordering, leverage and interest coverage.
Hi:- That ratio are not highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity and financial structure, reordering, leverage and interest coverage.
iii. Ho: Ratio analysis is primarily used to compare a company’s financial figures over a period of time.
HI: Ratio analysis is not primarily used to compare a company’s financial figures over a period of time.
1.4 RESEARCH QUESTION
- Can ratio analysis reveal the financial condition of the firm more reliable when trends in ratios over time are analyze?
- Are the management in better position to analyze the firm’s financial position?
- Can management use ratio analysis to determine the firms financial strengths and weakness?
- Can financial ratio be used for decision making by the various person such as the employees shareholders, creditors, investors etc.
1.5 OBJECTIVE OF THE STUDY
The objectives of this study are to establish the impact of financial ratio as tools for investment decision. Therefore the research work intends to achieve the following specific objectives.
- To offer a guide to portfolio analyst and would be investors on variable tools while trying to choose profit yielding securities.
- To evaluate the earnings of the business by forming a judgment as to the efficiency with which the management is using the resources invested in to business.
- To predict the future success of the business in term of earning and cash flows.
1.6 SCOPE OF THE STUDY
Ratio analysis is an important tool which could be used by, an investor or analyst to highlight the existing strength and weakness of the company as contained in its financial statement.
This research papers deals with the analysis of different types of financial ratios, possible interpretations of the validity and weakness of financial ratios.
In this research paper two years financial statement of the Nigerian Breweries Plc would be analyzed and compared.
1.7 SIGNIFICANCE OF THE STUDY
This research work will be of great importance as it will:-
- Develop a strong basis for making decision on capital investment by both individuals and corporate bodies.
- Provide necessary guidance to non-accountants and professionals alike on how they gather informations from various sources, internal or external to the organization in considering the financial implication.
- Serves as basis for further research work of ratios for academic excellence
- Be relevant to students who may want to have a practical insight on how ratios are used in investment decision and also those students who want to carry out a research work on this topic.
DEFINITION OF TERMS
- Ratio:- Ratio is an indicated quotient of two mathematical expression and as the relationship between two or more things.
- Investment:- It is the setting aside of certain proportion of income or profit to generate additional future returns.
- Fund Flow Analysis:- It is an evaluation of the firm statement of cash flows in order to determine impact and uses of fund on the firm operation.
- Prepaid Expenses:- Are the expenses of future period paid in advance.
- Accrued Income:- They are the benefit which the firm has earned but they are not yet been received in cash.
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