ABSTRACT
This study investigated financial
ratio as a tool for measuring performance in an industry with specific focus on
Nigerian Breweries Plc and Guiness Nigeria Plc. Six objectives were stated from
chapter one and several literatures were reviewed in the second chapter.
Informed by the six objectives stated, four hypotheses were formulated and
tested at 5% level of significance. Secondary data were obtained from the
annual reports of the selected companies spanning 2009-2014. Sample tables were
used to present the data, while t-test of difference in means was employed to
test the formulated hypotheses. Findings revealed that financial ratios can be
used to access profitability of an industry and that the liquidity and gearing
status of Nigerian Breweries Plc and Guiness Nigeria Plc are statistically the
same. Based on those findings, it can be concluded that the liquidity,
profitability, gearing and investment position of Nigerian Breweries Plc can
stand a good test of time to keep the company alive and running. It was
recommended inter alia that financial ratio figures should be investigated and
compared with the values of previous periods and budgeted figure for the year
so that changes can be discovered and a higher returns can be achieved in their
present and future planned operations.
TABLE OF CONTENTS
Title
page - - - - - - - - i
Certification
- - - - - - - - ii
Dedication - - - - - - - - iii
Acknowledgment - - - - - - - iv
Abstract - - - - - - - - v
Table
of Contents Abstract - - - - - - - - vi
CHAPTER ONE: INTRODUCTION
1.1 Background to the study - - - - - - - 1
1.2 Statement of the problem - - - - - - - 3
1.3 Aim and objectives of the study - - - - - - 4
1.4 Research questions - - - - - - - - 4
1.5 Research hypothesis - - - - - - - - 5
1.6 Significance of the study - - - - - - - 6
1.7 Scope of the study - - - - - - - - 6
1.8 Definition of operational terms - - - - - - 7
References - - - - - - - - - - 9
CHAPTER TWO: LITERATURE
REVIEW
2.1 Preamble - - - - - - - - - 10
2.1.1 Historical background of Nigerian Breweries
Plc - - - - 10
2.1.2 Sources of finance to Nigerian Breweries Plc - - - - 11
2.2 Conceptual framework - - - - - - - 12
2.2.1 Concepts of Financial Ratio Analysis - - - - - 12
2.2.2 Criteria for measuring performance - - - - - 13
2.2.3 Relevance of accounting information to
financial analysis - - - 14
2.2.4 Statement of financial position - - - - - - 15
2.2.5 Income statement - - - - - - - - 16
2.2.6 Users of financial analysis - - - - - - - 15
2.2.7 Types of Financial Ratio Analysis - - - - - - 18
2.2.8 Relevance of financial ratio and
interpretation to performance evaluation - 25
2.2.9 Limitations of Financial Ratio Analysis - - - - - 26
2.3 Summary - - - - - - - - - 27
References - - - - - - - - - - 28
CHAPTER THREE: LITERATURE
REVIEW
3.1 Preamble - - - - - - - - - 31
3.2 Research design - - - - - - - - 31
3.3 Restatement of research hypotheses and
research questions - - - 31
3.3.1 Restatement of research hypotheses - - - - - - 32
3.3.2 Restatement of research questions - - - - - - 33
3.4 Population of the study - - - - - - - 33
3.5 Sampling, procedure and sample size - - - - - - 33
3.6 Data collection instrument and validation - - - - - 33
3.7 Methods of data analysis - - - - - - - 34
3.8 Definition of variable - - - - - - - - 34
3.9 Limitations of the methodology - - - - - - 35
References - - - - - - - - - - 36
CHAPTER FOUR: DATA PRESENTATION,
ANALYSIS AND INTERPRETATION
4.1 Preamble - - - - - - - - - 37
4.2 Data presentation - - - - - - - - 38
4.3 Descriptive statistics - - - - - - - - 41
4.4 Test of hypotheses - - - - - - - - 43
4.5 Discussion of findings - - - - - - - 48
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATION
5.1 Summary - - - - - - - - - 50
5.2 Summary of findings - - - - - - - - 51
5.3 Conclusion - - - - - - - - - 51
5.4 Recommendation - - - - - - - - 53
5.5 Suggestion for further studies - - - - - - - 54
Bibliography - - - - - - - - - 56
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial management connotes
responsibility for obtaining and effectively utilization of funds necessary for
the efficient operation for an enterprise. Financial management is contemporary
time, is a managerial activity which concerns itself with the acquisition,
planning and control of corporate financial resources'. Panday (2000). Lately,
financial management activities has received tremendous emphasis in business
management, this is due to the fact that corporate finance cannot be
jeopardized. In effect, financial managers are tested effectively and use same
efficiently to meet the set goals and objectives of the company on one hand,
the other hand, to ensure planning performance. All the aims and objectives of
the company are focused towards solvency, i.e. promotion of owners' wealth
while ensuring profitability and continuity, on the other hand, to encourage
creditors through payment of their interest and the redemption of the principal
as when due, where it is redeemable.
In the bid to meet up with objectives of the company and to ensure
brilliant performance, the entire functions of the firm must be harnessed of
these objectives, the finance function is very important, it therefore covers
all functions concerned in attempting to ensure that financial resources are
obtained and utilized in the most effective way to secure attainment of the
objectives of the organization, some vital decision has to be taken with
respect to what investments to undertake, how to finance them considering the
Weighted Average Cost of Capital(WACC) and earnings reinvested. What should be
the dividend policy? How are debts to be repaid without adverse impacts on the
going concern? All these are sufficiently answered by the function of finance
in the organization, year in, year out to ensure good performance. When tasks
in the preceding paragraph are accomplished, the need arises that the
shareholders, creditors and other stakeholders are feedback by the overall
management of the company. This feedback is prepared by the accounting
sub-function to intimate all and sundry of the affairs of the company. The
financial accounting information is useful even to the management for effective
management as a guide post for management and not only them but owners(shareholders),
creditors, potential investors, trade unions, employees, customers, government
agencies; to facilitate assessment and evaluation of corporate performance.
This was the essential reason why government, through the Corporate Affairs
Commission (CAC), mandated every registered company to publish the statement of
accounts (Annual reports). These must contain among other things, the statement
and even the statement of financial position.
These are to be presented at the Annual General Meeting (AGM).
This rule operators at a considerate level for private companies as specified
in the Companies and Allied Matters Act (CAMA) 1990 sections 334 and 351.c
To a layman, the published account gives
sufficient information about corporate existence; this assumption evolved
overtime and gained recognition since it is known that the financial statement
summarizes the economic situation. This information if accepted on the face
value, can amount to gross misconception of the general performance evaluation.
Better means can be introduced to reach performance measurement, if attention
is converged and a thorough examination of the figures published in the
financial statement is done. This exploit is done through expressing these
figures in terms of the ratios to ascertain their relationship and analyzing
the results ratios as comparative figures with respect to acceptable indices.
It helps to study changes, experience overtime, to understand if there had been
improvement or otherwise recovered in the performance of a company in the study
period and why. Ratio analysis has been proven efficiencies in the measurement
of corporate performance. This is not to say that other schemes do not exist.
Such other schemes are: Trend Analysis, Multi Discriminate Analysis (MDA), Z'
score Analysis, Zeta Analysis etc, though they exist and are in .use, there are
somewhat extensions of the financial statement of Nigerian Brewery Plc for four
(6) years and sampling other information as it is deemed necessary, through
this information, test the efficiency of financial ratio analysis in measuring
performance the range of awareness of company's management and other
stakeholders to the use of ratios.
1.2 Statement of the Problem
Financial information is of immense
importance in one way or the other to the corporate body and all its affiliates
as mentioned above, i.e. owners, creditors, potential investors, Corporate
Affairs Commission (CAC) and other government agencies.
Although ratios are widely used to evaluate the financial position
and performance of business but they should be applied with great caution
because they have same problems. Since financial ratios are calculated from
accounting data, which are subjected to different interpretations and even
manipulations, two independent firms may use different depreciation method or
inventory valuation methods and depending on the procedures followed, reported
profits can either be raised or lowered. Reported profits of companies actually
operate a number of different divisions in quite different industries, thereby
making it difficult to develop meaningful set of industry averages for
comparison purpose. Even for those companies operating in one industry, it is
difficult to decide on a proper basis for comparison. Ratios of a company have
meaning only when they are compared with some standards. Also interpretation
and comparison of ratios are rendered invalid by the changing value of money.
In fact, prices change over the years and as a result, assets acquired at
different dates will be expressed at different in the Statement of Financial
Position. This makes comparison meaningless. The ratios calculated at a point
in time are less informative and effected as they suffer short term changes.
1.3 Aim and Objectives of the
Study
The aim and objectives of the study are to
use financial ratio analysis as a tool for measuring performance in an industry
with reference to Nigerian Breweries Plc, Iganmu, Lagos. Thus the study seeks
to achieve the following:
i. To expose the efficiency of financial
ratio analysis as a tool for measuring performance.
ii.
To determine the company's ability to meet its current obligations.
iii. To determine the
extents to which the company has used its long term solvency by borrowing funds,
iv. To access the
efficiency with which the company is utilizing its various assets in generating sales revenue.
v. To show how
financial ratio analysis can be harnessed by using it in conjunction with other
models,
vi. To ascertain the
overall operating efficiency and performance of the company.
1.4 Research Questions
As part of the assurance to be derived
that the aim and objectives of the project topic Financial ratio analysis as a
tool for measuring performance in an industry' like Nigerian Breweries Plc and
other competitors in the brewing industry like Guinness Nigeria Plc are
achieved, there are certain questions to be raised in the course of doing the
research work.
Such research questions include; is there any significant
difference between the Liquidity of Nigerian Breweries Plc and its competitors?
Is there any significant difference between the Profitability of Nigerian
Breweries Plc and its competitors? Is there any significant difference between
the Gearing of Nigerian Breweries Plc and its competitors? These are few of the
questions to be asked in trying to achieve the aims and objectives of the
research project.
1.5 Research
Hypotheses
Financial Analysis emanated as a result of
the research for better ways by which performance could be measured. To study this very well, the following
research hypothesis have been formulated.
1. H0: There is no significant difference between
the liquidity of Nigerian
Breweries
Plc and Guinness Nigeria Plc.
H1: There significant difference between the
liquidity of Nigerian Breweries Plc and Guinness Nigeria Plc.
2 H0: There is no significant difference between
the profitability of Nigerian
Breweries
Plc and Guinness Nigeria Plc.
Hi: There is significant difference between
the profitability of Nigerian Breweries Plc and Guinness Nigeria Plc.
3. H0: There is no significant difference between
the gearing of Nigerian
Breweries
Plc and Guinness Nigeria Plc.
H1: There is significant difference between the
gearing of Nigerian Breweries Plc and Guinness Nigeria Plc.
4. H0: There is no significant difference in the
investment performance position of
Nigerian Breweries and Guinness Nigeria
Plc
H1: There is a significant difference in the
Investment performance position of Nigerian Breweries and Guinness Nigeria Plc
1.6 Significance of the
Study
This research work at its successful
completion shall be of at significance
in the following ways:
i.
Owners- it will help the
shareholders to access what they have, the potent of growth in what they have
possibilities of profits and dividends, and most importantly the continuity of
the business I n which they have invested.
ii.
Creditors- it will help them
to evaluate the extent to which their loans are secured and how certain it is,
that the interest accruing on their loan will be paid. It shows that general
level of risk to which they are exposed.
iii. Potential
investors- this research will help potential investors to best access the
organization. Accessing the
present value and growth potentials in the stock of the
company.
iv. Government
agencies- this research will put government and its agents in a better position to evaluate the solvency of the company and act
accordingly. This could be in the direction of the tax administration, excise
duties, allowances and subsidies.
v. Business
management- it will help managers, in all the functions of the company, particularly within the finance function to measure the
performance of the entire company, once in a
while to ensure consistent progress in its affairs.
vi. Academicians- this
research work will serve as a reference point and aid those that want to
research further.
vii. Others- in one way
or the other, this research will be of immense advantage to such other groups
as trade unions, employees, customers, general public etc.
1.7 Scope of the Study
This research work is conducted within the
legal framework called 'Company' i.e. registered according to the requirements
of Corporate Affairs Commission (CAC) and in conformity with the Companies and
Allied Matters Act (CAMA) 1990 and other related laws in the country. This
research is converged to the particular study and analysis of the data
(Financial statement) and other information of the Nigerian Breweries Plc.
These are assumed to sufficiently represent the same or similar statute.
This research will mainly involve the comparison of result
analysis of responses as it will be seen in subsequent chapters.
1.8. Definition of
Operational Terms
1. Financial Statement-
This is the annual statement summarizing a company's activities over the last
years. They consist of the statement of comprehensive accounts and other
incomes, statement of financial position, statement of the total recognized
gains and losses, and if required the cash flow statement together with
supporting notes.
2. Financial Ratio- A
ratio calculated from two or more figures taken from the financial statement of
a company in order to provide an indication of the financial performance and
position of that company.
3.
Dividend-This is the distribution of the part of the earnings of a
company to all its
shareholders. This dividend is normally expressed as an amount per
share on the per value of the share.
4. Liquidity- The state of processing cash or cash equivalent,
having investment or land assets easily convertible to cash. The ability of a
company to meet short term corporate responsibility and liabilities as they
fall due.
5. Shareholders
Equity-The share capital and reserve of a company contributed by the numbers or
owners of the company.
6. Total Deposits- This is the total amount of money left with an
organization, such as a bank for safekeeping or to earn interest, or with a
broker, dealer etc as a security to cover any trading losses incurred.
7. Total Assets/ Investment- This refers to the total statement of
financial position figure of an organization comprising of cash and short-term
funds, bills, investment etc.
8. Gross
Earnings- This is the earning available to an organization before interest is
paid out.
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