THE IMPACT OF FINANCIAL RATIO ANALYSIS ON INVESTMENT DECISION (A CASE STUDY OF UNITED BANK FOR AFRICA PLC)
ABSTRACT
Ratios are highly essential profits tools in financial analysis that help financial analysts implements plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performance, they can be predictive too, and provide lead indications of potential problems areas. To be of optimal benefit and as well enable the users make well-informed decisions, financial, statements need to be analyzed by means of ratios. Therefore, in order to establish the role of ratio analysis in investment decisions, this research is carried out, using “United Bank for African” as a case study. The researcher made use of secondary sources of data collection. The data Collected via the secondary data sources were analyzed using ratios analysis play an important role in investment decision.
TABLE OF CONTENT
PAGES
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of Content vi
CHAPTER ONE
1.0 Introduction 1
1.1 Background of the Study 1
1.2 Statement of the Problems 2
1.3 Objectives of the Study 3
1.4 Research Question 4
1.5 Hypothesis of the Study 5
1.6 Significance of the Study 6
1.7 Scope of the Study 7
1.8 Organisation of Study 7
1.9 Definition of Terms 7
CHAPTER TWO
2.0 Literature Review 8
2.1 The Scenario of Ratio Analysis 8
2.2 Financial Statement Analysis 10
2.3 Parties Interested in Financial Statement Analysis 10
2.4 Objectives of Financial Statement Analysis 11
2.5 Sources of Information for Financial
Statement Analysis 13
2.6 Ratio Analysis 14
2.7 Uses and Objectives of Ratio Analysis 16
2.8 Limitations of Ratio Analysis 38
2.9 Capital Investment Decision 41
2.10 Capital Versus Investment 42
CHAPTER THREE
3.0 Research Method and Procedure 45
3.1 Area of Study 45
3.1.1 History of Uba 46
3.1.2 Uba Vision 48
3.1.3 Uba Mission 48
3.2 Data and Method of Collection 49
3.3 Analytical Technique 50
3.3.1 Liquidity (Short-Torm Solvery) Ratios 50
3.3.1.1 Current Ratio 50
3.3.2 Profitability (Activity) Ratios 51
3.3.2.1 Return on Assets (ROA) 52
3.3.2.2 Return on Operating Assets 53
3.3.2.3 Return on Total Assets 53
3.2.4 Return on Equity 54
3.3 Debt Management Ratios 55
3.3.3.1 Debt Ratio 56
3.3.3.2 Debt –to-Equity Ratio 56
3.3.3.3 Leverage (Gearing) Ratio 56
3.4 Limitation of the Study 58
CHAPTER FOUR
4.0 Data Presentation and Analysis 59
4.1 Introduction 59
4.2 Evaluating the Liquidity and Gearing
Position of the Organization 60
4.2.1 Liquidity Ratio 60
- Profitable Ratio 61
- Debt Management Ratio 63
CHAPTER FIVE
- Summary 66
5.1 Conclusion 69
5.2 Recommendation 70
References 72
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
One of the most important long term decisions for any business relate to investment. Investment is the purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources to purchase a machine/building or other asset, which will then yield returns to an organization over a period of time.
Ratio Analysis is primarily used to compare a company’s financial figure 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 business, both in hand and out of your industry.
Making big investment decisions mean that vie must allocate substantial amount of major resources of people, time, technology, intellectual capital, and of course money. A high quality decision process requires that our choices are well formulated, that consequences are understood and well explored, that our preferences are of the proposed decisions, and that any actions we take are focused on getting result. One of the most important long term decisions for any business relate to investment. Investment is the purchase or creation of assets with the objective of making gain in future.
1.2 STATEMENT OF THE PROBLEMS
In Nigeria the problems of business enterprises are not difficult to identify such problems include;
- a) Poor allocation of resources
- b) Misplacement of physical and financial resources
- c) Lack of proper accounting record
- d) Inability to analyze the current trend of events and using the current financial indicators to predict the future.
Therefore, in ratio analysis, the problems faced by company in measuring its corporate performance are as follows:
- A company with high turnover cannot be easily compared with another company with low turnover without the use of ratio.
- Comparison of two companies may be difficult as a result of size.
iii. A company with many products lines may find its difficult to take decisions without proper analysis of ratios.
- Forecasting earning by financial analysis will be a problem without appropriate price earning ratio.
Precise financial knowledge is absolutely essential, and this knowledge is within the group every manager who understands and applies the principles of ratio analysis. In company where managers do not have this kind of financial knowledge, serious difficulties are more likely to limit the growth and profitability which determine business success.
Financial statement, including the final accounts of business are produced not merely for their own sakes, but for the uses of which they can be put by various parties interested in different aspects of these statements.
1.3 OBJECTIVES OF THE STUDY
The objective of this research work is to:
- Determine capital investment decision and apply ratio analysis to determine the strength and weakness of the firm.
- The research aim at analyzing and interpreting the level of performance of the bank through the use of financial ratio.
- Determine the efficiency and profitability of the companies.
- To analyze the impact of ratio analysis on investment decision.
- Look at the potential and actual growth of the company or bank.
1.4 RESEARCH QUESTION
- How can capital investment decision and ratio analysis and the strength and witness be determined?
- To what extent can the research aim at analyzing and interpreting the level of performance of the bank through the
- Can efficiency and profitability of the companies be determined?
- How can the impact of ratio analysis on investment decision be analyzed?
- To what extent can the potential and actual growth of the component or bank be looked upon?
1.5 HYPOTHESIS OF THE STUDY
Hypothesis is the conjectural statement of the relationship between two or more variables. Hypothesis statement is what is being looked for in a research context. It is the proposition that can be put to test to determine validity. Without hypothesis, research works is unfocused and constitute a mere empirical wandering to be tested. In order for this study to be focused. The following hypothesis were adopted:
– Null hypothesis represent by H0 and
– Alternative hypothesis represent by H1
Hypothesis 1
H0: Financial ratio analysis has no impact on investment decision.
H1: Financial ratio analysis has impact on investment decision.
Hypothesis 2
H0: That liquidity ratio will not give a picture of the company short term financial situation of solvency.
H1: That liquidity ratio will give a picture of the company short term financial situation of solvency.
1.6 SIGNIFICANCE OF THE STUDY
In assessing the significance of various financial data for effective investment experts engage in financial decision, experts engage in financial analysis and the process of determine and evaluating financial ratio. Therefore, the purpose of this research work is as follows:
- It serves as a tool for the analysis of company’s financial statement to determine how well or poorly the enterprises or business was performed over the period in question.
- It will give companies and other users of financial statement or information the opportunity to assess the significance of various financial data and the process of determining and evaluating ratios.
- It could as well serve as indications to company’s activities, such as the ratio between the company’s current asset, current liabilities or between its account receivables and its annual sales.
- It will help management to study the performance of suppliers, customers, competitors and even prospective subsidiaries and affiliates in a systematic way.
1.7 SCOPE OF THE STUDY
This research work will cover a period of five (5) years (from 2007 to 2011).
1.8 ORGANISATION OF STUDY
The research work is to be organized in five chapters as follows:
- Introduction
- Literature review
- Research method and procedure
- Data presentation and analysis
- Summary, conclusion and recommendation
1.9 DEFINITION OF TERMS
(i) Misallocation: This could be defined as an abnormal ways of placing or allocating resources.
(ii) Accounting Records: This is a record of company’s financial transactions.
(iii) Management: This is the top hierarchy of the organization that organized and supervised the organization’s operation so as to maximally achieve corporate aims.
(iv) Financial Statements: This is the statement of account prepared by the business enterprises that reflects the company’s operation, expenses incurred and the net profit generated there in.
(v) Ratio: This is the percentage used to measure company’s profitability and efficiency.
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