This project expatiate the benefits derived from the proper application of ratio analysis and other indicators used in analyzing in the most effective and efficient manner.
The data needed for this research study was obtained from primary and secondary sources. The primary source includes; questionnaires distributed to the staff of GT Bank Plc, while the secondary data includes; financial statement of GT Bank, journals, consulted textbooks, News papers, Stock exchange report and internet.
The data gathered was analyzed based on weight assigned to the data and the use of statistical average i.e. mean.
The findings from the research are that base on probability, the investment yield returns of 18.52k on every naira of capital employed by the company. Moreover, the total assets turnover is 12 times which shows the organization is still improving on yearly basis.
The recommendation is that other non-financial indicators should be put into consideration for analysis and periodical ratios should be computed to reveal the strength and weaknesses within the organization.
TABLE OF CONTENTS PAGES
Title Page i
Table of Content vi
CHAPTER ONE : INTRODUCTION 1
1.1 Background of study 1
1.2 Statement of the problems 3
1.3 Objectives of Study 5
1.4 Significance of Study 6
1.5 Limitation of the Study 7
CHAPTER TWO: LITERATURE REVIEW
2.1 Uses of Financial Ratio 14
2.2 Uses of Financial Analysis and interpretation
to the users of Financial Statement 15
2.3 Classification of Ratio and the interpretation 20
2.4 Basis of Comparison 34
2.5 Changes in the market value of organization’s
share on the stock exchange market (SEM) in
relation to organization operational performance 35
CHARPTER THREE: METHODOLOGY
3.2 Data Collection Method 40
3.3 Description of Research Instrument 41
3.4 Formation of Hypothesis 42
3.5 Analytical Procedure 44
3.6 Statistical Formula 44
3.7 Limitation of the Methodology 45
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION OF HYPOTHESIS
4.1 Introduction 46
4.2 Data analysis and interpretation of data 46
4.3 Computation and presentation of ratio figures 55
4.4 Value added statement as a tool for financial analysis 66
4.5 Limitation of ratio analysis 68
CHAPTER FIVE: THE SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Introduction 70
5.2 Findings 70
5.3 Conclusion 72
5.4 Recommendation 73
1.1 BACKGROUND OF THE STUDY
The importance of accounting in any business organization and to its external environment cannot be over emphasized. It cut-across keeping proper records of income and expenditure for easy determination of profit and loss, arising from the business activities and records of asset and liabilities to depict the position of the business organization at the end of the accounting year.
Moreover, other components of the financial statement will have to be put into consideration in order to give comprehensive analysis and interpretation. The need for proper interpretation of terms and figures arrived at in the profit and loss account, balance sheet as well as other components of the financial statement led to the analysis of different part of the financial statement as the users have interest in different aspect of the financial report. Different methods of interpretation are put into consideration which includes ratio analysis and other relevant indicators for a good understanding of the content of the financial statements.
The financial statement can be of different use to different users, some of these users ranges from shareholders (potential and existing), employees (past, present and potential), customers (potential and existing), management, competitors, creditors (potential and existing), local communities, financial analyst, government and the general public.
These different users will have interest in different aspect of the financial statement, and the following components of the financial statement will be of use to these users:
- Statement of accounting policies
- A profit and loss account/income statement for the year
- Balance sheet as at the last day of the financial year
- Auditors’ report
- Directors’ report
- Cash flow statement
- Value added statement for the year
- Five year financial summary
- The group or consolidated financial statement
This project will be looking at the effect of the analysis and interpretation of these components on the user of the financial report and their response or likely response, and likewise the aftermath of their response on the organization itself. Where there is a negative response, what is the way out for the organization and how can the organization maintain a steady improvement and recommendation on how such improvement can be attained.
1.2 STATEMENT OF THE PROBLEMS
The interpretation of findings requires the use of ratio and other relevant indicators, and likewise comparison of such ratios either with the organizations past ratios or with similar organization ratio which are with in the same industry or with industrial average with in its industry. The following problems always surface.
- The comparison with other companies using different accounting policies, regarding treatment of some material items, for example stock valuation foreign currency translation fixed asset revaluation etc.
- The effect of inflation will also make interpretation of ratio invalid as the future inflation rate will not be included in the current ratio analysis.
- The account having been prepared using historical cost, during a period of change in price, such ratio interpretation may be misleading.
- The correctness of information gotten from other organization being compared i.e. information from the financial statement, how correct are they or what is the level of their preciseness. Here the report of the external auditor will be relevant.
1.3 OBJECTIVES OF STUDY
The objectives of the study are to:
- Examine how to use ratio analysis as a technique of analyzing the financial information as contained in the statement of affairs and the profit statement.
- Examine the ratio used by the top management for decision making and how effective these decision are on the financial statement and to users
- Examine the effect of error and fraud on the users of financial statement and how it has affect the organization performance
- Examine the linkage between the organization performance and the effect of demand and supply on the company’s shares on the stock exchange market
- Enable users of financial statement know its interpretation and there by knowing the strength and weaknesses of the firm upon which decision on investment is based.
1.4 SIGNIFICANCE OF STUDY
This study will expatiate in a greater details the benefits that can be derived from the proper and vast application of ratio analysis in the most efficient and effective manners.
It will help to emphasis on various areas of interest which includes profitability trends, solvency, financial strength, scope of improvement, borrowing potential, gearing, interest cover and dividend cover etc.
It will enlighten users on the understanding of the trend of stock valuation.
It will also enlighten users on how ratios can be of more help to them in making their decisions and show the relationship between these ratios.
It will help the organization in measuring its performance over series of accounting periods and also depicts measurement of its performance in the industry the organization operates.
1.5 LIMITATION OF THE STUDY
The major limitation for this research is time constraints, financial inadequacy and restricted access to some information needed from the companies of interest where they are claiming they are “avoiding insider trading”.
Nevertheless, the basic information at my disposal is enough to given average and reasonable report.
- DEFINITION OF TERMS
Ratio:It is a yardstick that relates two pieces of figures to each other by dividing the first figure by the second.
Financial Statement: This is the end product of the general accounting activity which communicates description of the financial condition and operation of a business entity. The two principal financial statements are Income statement and balance sheet.
Balance Sheet: A statement of a firm’s assets, liabilities and capital at a specific date usually a year.
Asset: Economic resources owned by a going concern business organization
Fixed Asset:These are assets which extend beyond an accounting period.
Tangible Asset: These are physical asset like plant, buildings, land, furniture’s
Intangible Asset: These are non physical asset such as Goodwill, patent right
Current Asset: These are assets which can be converted into cash within an accounting year or within the operating cycle, whichever is greater.
Current Liabilities: These are liabilities that are payable within the current accounting year or operating cycle.
Investment: This is the shareholding or monetary stake in other business concerned.
Investment Turnover: This is the ratio of sales to investment
Capital Structure: This is the inter-relationship between long-term sources of financing, represented by long-term debt, preference share capital and net worth. Sometimes a distinction is made between capital structure and financial structure; the latter term includes current liabilities.
Debenture: A long-term investment that is not usually secured on a mortgage or a specific property.
Equity: The net worth of a business, consisting of share capital, share premium and reserves and surplus. Common equity is that part of or the ordinary shareholders. Total equity will includes preference share capital.
Shareholders: The owner of the company.
Management: Decision making body of an organization. It is a group of people who manages the company affairs.
Insider Trading: This is the crime of buying or selling shares in a company with the help of information known only to those connected with the business.
Analysis: Separation into parts and interpretation of figures.
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