Abstract
The study is aimed at examining the extent to which firms
uses financial indicators as key information items which portray the financial
health or otherwise of an organization. The broad objective of this study is to
ascertain the company’s financial strength and weakness using financial
indicator analysis and also to ascertain the yardstick for comparison of
performance relative to other firms in the same industry. The primary and
secondary source of data collection was used in this study and the stratified
and systematic sampling techniques were used to select fifteen firms which
served as the sample size of the study. The chi-square statistical tool was
used to test the slated hypotheses and the findings revealed that there is
significant relationship between a firm’s performance and financial indicators.
It was concluded that firms appraise their performance using financial
indicators more especially than profitability ratios which are computed
annually to appraise their performance. It was recommended among others that
management should not attach too much importance to the profitability ratio
alone as other users have interest in leverage ratios and liquidity ratios.
TABLE OF
CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgments iv
Abstract v
Table of Contents vi
Chapter One: Introduction
1.1 Background
to the Study 1
1.2 Statement
of Problem 2
1.3 Research
Questions 4
1.4 Objectives
of the Study 4
1.5 Statement
of Hypotheses 5
1.6 Significance
of the Study 6
1.7 Scope
of the Study 6
1.8 Limitations
of the Study 7
1.9 Definition
of Terms 8
Chapter
Two: Review of Related Literature
2.1 Introduction
10
2.2 Historical Background of Financial
Indicators 10
2.3 Classification of Indicators 12
2.4 Non-Ratio Financial Indicators 25
2.5 Users of Financial Indicators 26
2.6 Standards of Comparison 27
2.7 Limitations of Financial Indicators 29
Chapter Three: Research Method and
Design
3.1 Introduction
33
3.2 Research
design 33
3.3 Description
of the Population of the Study 34
3.4 Sample
Size 34
3.5 Sampling
Techniques 34
3.6 Sources
of Data Collection 35
3.7 Method
of Data Presentation 36
3.8 Method
of Data Analysis 37
Chapter Four: Data Presentation, Analysis and
Interpretation 4.1 Introduction
39
4.2 Presentation
of Data 39
4.3 Data
Analysis 41
4.4 Hypothesis
Testing 50
Chapter Five: Summary of
Findings, Conclusion and
Recommendations
5.1 Introduction 58
5.2 Findings
58
5.3 Conclusion
59
5.4 Recommendations
59
References 61
Appendices 63
CHAPTER ONE
INTRODUCTION
1.1
Background
of the Study
Financial indicators are the monitoring
points used to ensure that a department is meeting its financial goals set in
the strategic plan. These indicators are typically monitored on a monthly basis
with annual roll up (Wireman, 2010). Financial indicators are key information
item contained in financial report (statement) which portrays the financial
health or otherwise of an organization.
Measuring business performance is something which has been
in business for a long time. Many organizations have been using financial
indicator as net profit margin, Return on Asset (ROA) to name a few, to qualify
the performance of the company (CIMA, 2004).
Financial indicators, properly use highlighted
opportunities for improvements, they pinpoints “soft spot”. In a company and
point the needs for further analysis and proffer solution to problem. The
viability of a firm in an industry could be ascertained through the value shown
from the financial indicators calculation from the financial statement
(reports) (Abdallah, 2012).
Different users of financial report have interest in
special component of information contained therein,that is the more reason why
different types of indicators are computed such as liquidity, leverage,
activity (asset management), profitability, market value ratio etc to outcross
the interest of the various users. Different criteria of appraisal can be from
these, which are very useful to the users.
1.2
Statement
of Problem
Every stakeholder in business has particular interest in
business or firms financial statement and not all have the skills to analyze
such information to enable them make relevant decision. Although most firms do
measure their performance through financial indicators, it’s not done in a way
that will be meaningful to the least stakeholder. Most time, high profits are
reported but these are presented to the owner and other interested parties
without support. It is only when analysis of these reported account are made
that one can get further insight into the strength and weakness of a firm.
The closure of platinum Habib Bank (Bank PHB), Savannah
Bank of Nigeria Plc is a test case, the major reason advanced by central bank
of Nigeria is that of financial weakness. If financial indicators analysts have
been made at that time and the entire public was following the trend most
people wouldn’t have been victims. Therefore the exigency of financial
indicator analysis to appraise corporate performance become apparent. This will
enable shareholders employees, government etc to make relevant decisions.
Besides financial statement without analysis may not make
meaning to most users; hence analyzing these statements by different indicators
will be a yardstick with which most companies can be made.
The study therefore, intend to examine the extent to which
banks and insurance companies operating in Delta State use financial indicators
to evaluate their performance and also its limitation.
1.3
Research
Questions
The following research questions are addressed in the
course of this work.
1.
To
what extent do firm appraise their performance?
2.
To
what extent do firm measure their performance?
3.
To
what extent do firms compare their financial indicators?
1.4
Objectives
of the Study
i.
To
ascertain the company’s financial strength and weakness using financial
indicator analysis.
ii.
To
ascertain the yardstick for comparison of performance relative to other firms
in the same industry.
iii.
To
evaluate which performance measure is better to be used in measuring the
profitability of the firm.
1.5
Statement
of Hypothesis
This study addresses the following hypotheses.
Hypothesis
One
Ho: There is no significant relationship between a firm’s
performance and financial indicators.
HI: There is significant relationship between a firm’s
performance and financial indicators.
Hypothesis
Two
Ho: There
is no significant relationship between a firm’s appraisal performance and
financial indicators.
HI: There
is significant relationship between a firm’s appraisal performance and
financial indicators.
Hypothesis
Three
Ho: There
is no significant relationship between the use of financial indicators and
other forms of performance evaluation method by firms.
HI: There
is significant relationship between the use of financial indicators and other
forms of performance evaluation method by firms.
1.6
Significance
of Study
This study is expected to be of significant importance to
many parties. Since the study revolves around one of the popular issues of
current business scenario because all users of financial statement are interest
in the analysis of the information contained therein. So as to enable them
deduce opinion about the financial indicator to appraise a firm the users can
determine.
1.
The
ability of a firm to meet its long term solvency, i.e. borrowed fund has been
used.
2.
How
efficient the firm has utilized it’s various assets in generating revenue.
3.
The
overall operating efficiency and performance of the firm.
4.
To
serve as a reference materials for both academicians and practitioners which
would also help interested researchers to carry out more extensive studies in
the area.
1.7
Scope
of the Study
This study focuses on examining the financial health of
firms using financial indicators as a basis for evaluating corporate
performance with relevant references to some selected banks which include
Ecobank, United Bank for Africa (UBA), Zenith Bank and Insurance Companies
(Staco Insurance Plc, Greater Nigeria Insurance Plc) all located in Asaba,
Delta State.
1.8
Limitations
of the Study
This study is not without its limitations like any other
study some of the limitation is that financial data beyond audited financial
statements was unavailable to the researcher. This is so because according to
the policy of the company those financial statements that have not been
published in newspapers or the annual report of the bank cannot be disclosed.
There was also this financial constrain that prelude the
researcher from conducting a job on the firms, the non-receptive attitude to
respondents further compounded the problem while some were receptive and
willing to comply by way of filling questionnaires open mindedly but others
were not.
1.9
Definitions
of Terms
This study uses a comprehensive definition of some terms
which may not be familiar to some individuals, they include.
Bank
A bank is a
financial institution that deals with fund raising and the collection of
customer’s fund, lending or investing surplus deposit until they are required
for payment. A bank is also known as a financial institution where money are
kept for safety and collected on demand or request.
Insurance Company
This is a
company that offers insurance policies to the public, either by selling
directly to an individual or through another source such as an employee’s
benefit plan.
Financial Statement
This is a
formal record of financial activities of an entity. These are written reports
that quantify the financial strength, performance and liquidity of a company.
This is a statement prepared by the directors of a company to be presented to
the shareholders at the annual general meeting (AGM).
Exigency
This is an
urgent need or demand that one must deal with.
Yardstick
This is a
standard used for judging how good or successful something is.
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