A STUDY OF THE USE OF FINANCIAL RATIOS FOR THE ASSESSMENT OF THE PERFORMANCE AND THE PROFITABILITY OF A FIRM

A STUDY OF THE USE OF FINANCIAL RATIOS FOR THE ASSESSMENT OF THE PERFORMANCE AND THE PROFITABILITY OF A FIRM

ABSTRACT

This research work “The study of the use of financial ratios for the assessment of the performance and profitability of a firm” touched all vital aspects of ratio analysis.  In addition, it identified the various kinds of ratios, their uses, those that benefits from such analysis, as well as the limitations associated with the concept of financial ratio analysis.

However, this research work showed the relevance of the financial ratio analysis mostly to the publics of an organization, that is, the equity holder, short-term creditors, long-term creditors, the management, the customers/client and the tax authority.  Also, a lending banker can also be able to assess the viability of a borrowing firm with the help of ratio analysis in order to decide on whether to or not to extend credits.

To examine this research work, the researcher embarked on secondary source of data as recommended.  This entails the review of related literature by renowned and prominent authors of textbooks, journals, magazines and newspapers, as well as other publications.

This research work is essential for both students and those in the agricultural sector.  It constitutes a good reading for practioners in the field of agriculture.

TABLE OF CONTENTS TITLE PAGE                                                                II

APPROVAL PAGE                                                      III

DEDICATION                                                               IV

ACKNOWLEDGEMENT                                             V

ABSTRACT                                                                  VI

TABLE OF CONTENTS                                             VIII

CHAPTER ONE: INTRODUCTION                           1

1.1       BACKGROUND OF THE STUDY                    1

1.2       STATEMENT OF THE PROBLEM                            2

1.3       OBJECTIVE OF THE STUDY                          3

1.4       SIGNIFICANCE OF THE STUDY                    4

1.5       LIMITATION OF THE STUDY                          6

1.6       DEFINITION OF TERMS                                  6

CHAPTER TWO:  REVIEW OF RELATED LITERATURE

2.1       THE CONCEPT OF FINANCIAL RATIO ANALYSIS10

2.2       GENERAL USES OF FINANCIAL RATIO ANALYSIS11

2.3       STANDARDS OF COMPARISON AND BASIC FINANCIAL STATEMENTS                                                                13

2.4       TYPE OF FINANCIAL RATIOS                                 14

2.5       LIMITATIONS OF FINANCIAL RATIO ANALYSIS  23

2.6       RATIO ANALYSIS AND THE LENDING BANKER24

CHAPTER THREE:  RESEARCH DESIGN AND METHODOLOGY

3.1       SOURCE OF DATA                                                    30

3.2       LOCATION OF DATA                                                 30

3.3       METHODS OF DATA COLLECTION                       31

CHAPTER FOUR

FINDINGS                                                                              33

CHAPTER FIVE:

RECOMMENDATIONS AND CONCLUSION

5.1       RECOMMENDATION                                                 36

5.2       CONCLUSION                                                             37

BIBLIOGRAPHY                                                                   38

PROJECT PROPOSAL

The researcher intends to write on the topic “A study of the use of financial ratios for assessments of the performance and profitability of a firm”.

Presently, most lending bankers are faced with the problem of loan default as a result of in appropriate study or appraisal of the financial statements of the borrowing firm with the help of financial ratio analysis.  Therefore, the proposed objective of the study is to identify the various ratios, roles and problems with the use of financial ratios in assessing the performance and profitability of a borrowing firm.

However, the researcher also intends to source her data through the secondary means of data collection, which implies the review of related textbooks, journals, magazines, etc.

Furthermore, the researcher intends to emphasis or limit her topic on the aspect of bank lending in relation to the use of financial ratio analysis to assess the performance and profitability of a borrowing firm.

Conclusively, in respect to the plan for the review of relevant literature, the researcher intends to elaborate more on the concept of financial ratios, various kinds of financial ratios, their uses and importance, as well as limitations on their uses or application.

CHAPTER ONE

INTRODUCTION

1.1                   BACKGROUND OF THE STUDY

The significance of Financial Rations and its analysis can not be over emphasized.  According to Iloh (2001), a good financial planning for any functional organization has to be related to the existing strength and weakness of such organization.  In the effort to discover the aforementioned factors, it becomes necessary to evaluate the performance of such organization over a given period.   Financial Ration analysis is therefore one of the methods used in determining the level of performance of an organization.  It can be explained as the techniques of reducing aggregate financial data into meaningful quotients, which are compared to other existing financial data.

However, the researcher has developed interest in this particular topic in order find out the impact of financial ratio analysis, mostly to a lending banker.  This is because, the issue of credit extension is not an easy task and is of technical in nature, one of the criteria for a successful lending is the review of the Financial Statements of a borrowing firm.  This is actually carried out with help of ratio analysis.

Furthermore, the analysis of such financial statements will enable a lending banker to access the viability of such borrowing firm, in the area of liquidity, profitability as well as the nature of its funding.

Conclusively, having indept knowledge of the above concepts mentioned above through Financial Ration analysis, the lending banker will now be able to take appropriate decision on either to accept or reject a given loan proposal or request.

1.2    STATEMENT OF THE PROBLEM

The occurance of loan default is becoming so alarming in most NigerianBanks.  This has affected most banks, specifically their capital adequacy, which invariably led to distress and failure. According to Orjih (1996), manipulation of accounting records by borrowers as well as inappropriate review and analysis of the financial statements of the borrower are among the causes of loan default and bad debt.  That is, it creates room for the borrowers of fund to deviate from the terms of payment or repayment of fund borrowed from the lending banker.

For several years, most banks have experienced distress and failure as a result of bad lending through inappropriate analysis of financial statements.  Therefore, the researcher intends to find out the necessary measures that could be adopted in order to remedy this urgly situation.

1.3    PURPOSE/OBJECTIVE OF THE STUDY

The study of this research work (the use of Financial Rations for the assessments of the performance and profitability of a borrower by a lending banker) intends to achieve.