ABSTRACT
The study examine the roles played by financial ratios in the prediction of going concern of deposit money banks in Nigeria.it was based on the following objectives (1) To measure the effectiveness of financial ratios in financial statements analysis of deposit money banks in Nigeria. (2) To determine how financial ratios can be used to predict the continuity of deposit money banks in Nigeria. (3) To identify the challenges/problems faced by deposit money banks in Nigeria in using financial ratios in financial statement analysis. The data was sourced through secondary data generated from the annual reports and accounts of deposit money banks in Nigeria for the period of five years (2017-2021).the result of the study shows that financial ratios are effective in the analysis and prediction of going concern of banks. Based on the findings the study recommends that it is evident that some of the banks have some problems regarding some single ratios, but on a combined effect assessment, all the banks have performed fairly well. The return on investments and net worth respectively were very low. It is therefore recommended that the management of the banks under study should carefully analyze all their assets both fixed and current and their subsidiaries with a view to selling off those considered as not contributing enough to their asset mix targets. It is recommended that the companies should seek means of reducing their total debt level as this will reduce their provision for liabilities and charges as well as clear tax liabilities that are outstanding which dominate their entries for amount due to creditors over a year.
TABLE OF CONTENTS
Dedication………………………………………………………………i
Declaration……………………………………………………………..ii
Certification/Approval………………………….......………….………iii
Acknowledgement………………-----…………………………………iv
Table
of contents………………………………………………………vi
List
of tables………………………--…………………………………vii
Abstract………………………………………………………………viii
CHAPTER ONE
1.1
Background of the Study……………………………………………….1
1.2
Statement of the Problem………………………………………………3
1.3
Objectives of the Study…………………...………………………………4
1.4
Research Questions……………………...………………………………...4
1.5
Research Hypothesis…………………...………………………………….5
1.6
Significance of the Study…………………...……………………………5
1.7
Scope of the Study…………………………………..……………………5
1.8
Definition of key
Terms............................................................................6
CHAPTER TWO
LITERATURE REVIEW
2.1
Introduction...........................................................................................................7
2.2
The concept of financial ratios………………………………………7
2.2.1
Classification of financial ratios……………...……………………9
2.2.2
Standard of comparison…………….……………………………16
2.2.3
Types of comparison……………………………………………16
2.2.4
Objectives of financial ratios……………………………………17
2.2.5
Benefits and usefulness of financial ratios…………………….18
2.2.6
Problems of financial ratios……………………………………18
2.2.7
Limitations of financial ratios…………………………………19
2.2.8
Going Concern as an Accounting Concept...............................22
2.3.
Review of Empirical
Literatures.................................................. 23
2.4 Theoretical
Framework..................................................................25
2.4.1
Financial Intermediation Theory of banking................................25
2.4.2
Credit Creation Theory of
Banking..............................................25
2.4.3
Older fractional Reserve
theory....................................................26
CHAPTERTHREE
RESEARCH
METHODOLOGY
3.1 Introduction…………………………………………………………27
3.2
Research Design……………………………………….………………….27
3.3
Population of the study…………………………………………………..27
3.4
Sample size and sampling technique…………………………………….28
3.5
Sources of data collection………………………………………………..29
3.6
Method of data collection……………………….………………………..29
3.7
Variables and their measurement…………………………………………30
CHAPTER FOUR
DATE PRESENTATION AND ANALYSIS
4.1
Introduction………………………………………………………………32
4.2
Presentation and analysis of data………………………………………….32
4.3
Analysis of other Data…………………………………………………….33
4.4
Test of
Hypothesis.........................................................................35
4.5
Summary of the Findings………………………………………...36
CHAPTER FIVE
SUMMARY CONCLUSION
AND RECOMMENDATION
5.1
Summary………………………………………………………….37
5.2
Conclusion………………………………………………………..38
5.3
Recommendation………………………………….……………....39
5.4
Frontiers for Further
research..........................................................39
REFERENCES
APPENDIX
LIST OF TABLES
Table 3.1 population of the
study…………………………………………..27
Table 3.2 sampled banks of the
study…………………………………….28
Table 4.1 computation of current
ratios…………………………………33
Table 4.2 computation of net working capital
ratios…………….33
Tables 4.3 computation of debt to equity
ratios……………………34
Table 4.4 computation of return on
equity………………………………34
Table 4.5 computation of return on capital
employed……………35
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Ratio
analysis is a very important tool of financial analysis. Financial analysis is
the process of evaluating accounting data in order to determine the operational
performance as well as the financial position of the firm. Financial analysis
provides information as to the financial strength and weakness of a firm and
this helps in building up the framework for future plans of the firm. Hence
financial analysis is the first in making plans as it clears ground for
sophisticated forecasting and actual planning activities since a good
understanding of the past is a pre-requisite for future predictions.
According
to Pandey (2000), financial analysis is the process of identifying the
financial strengths and
weaknesses of the
firm by properly
establishing relationships
between the items
of balance sheet
and the profit
and loss account. Financial analysis
can be undertaken
by management of
the firm, or
by parties outside the
firm, viz, owners,
creditors, investors and
others.
Financial
information provided in financial statements are useful in business decisions.
However, it must be noted that financial statements are means to an end and not
an end in themselves. In view of the summarized nature of the information
contained in financial statements, they need to be analyzed and interpreted by
means of financial ratios to enable management and stakeholders understand them
and make well-informed predictions.
Ratio
analysis is perhaps the most widely used. A ratio is simply the relationship
between the one number and another number. The
level of historical trends
of these ratios
can be used
to make inferences about a company’s financial condition,
its operations and
attractiveness as an
investment. A business is
considered a going concern
if it is
capable of earning
a reasonable net
income and there
is no intention or
threat from any
source.
Closely
related is the distinction between the value of a bank in liquidation and the
value of a bank as a going concern. For instance, one of the motivations for
the 1991 legislation was that the net value of a bank tends to decrease when
the bank ceases to be a going concern and moves into liquidation model. Thus,
the level of capital that is adequate for regulatory and supervisory purposes
may differ between banks operating normally and banks in the process of
liquidation.
Udeh
(2006) defined financial ratio as quotient of two mathematical expressions and
or as the relationship between two or more items expressed in figures. A ratio
is used in financial analysis as a yardstick for evaluating the financial
positions and performance of a firm as the absolute figures contained in the
financial statements do not provide meaningful information on the performance
and financial position of a firm.
According
to Igben (1999:423), “Accounting {or financial} ratio is a proportion or
fraction or percentage expressing the relationship between one item in a set
financial statements and another item in the financial statements. Accounting
ratios are the most powerful of all tools used in analyzed and interpreting
financial statements”.
Ratios
are indices derive from expressing the relationship between financial data. A
ratio is an expression of mathematical relationship between one quality and
another usually expressed as a fraction, a percentage, and decimal. E.g. the
ratio 2:1 may be ½, 200 %.( Iwora G.A.2005)
Going
concern is one of the accounting concepts; it means that the business unit will
operate in perpetuity, i.e. the business is not expected to be liquidated in
the foreseeable future. A business is considered a going concern if it is
capable of earning a reasonable net income and there is no intention or threat
from any source. The directors are mandated by the companies and allied matter
Act 1990 CAMA to prepare periodic financial statements that give a summary of
the business transaction for the financial period under question.
Going
concern as an accounting concept states that an enterprise will continue in
operational existence for the foreseeable future. This means in particular that
the profit and loss account and balance sheet assume no intention or necessity
to liquidate or curtail significantly the scale of operation. (Adeniyi a.
Adeniji 2012)
The
'going concern' concept assumes that the business will remain in existence long
enough for all the assets of the business to be fully utilized. Utilized assets
means obtaining the complete benefit from their earning potential. Ratios
generally are not useful unless they are benchmarked against something else,
like past performance or another company. Thus, the ratios of firms in
different industries, which face different risks, capital requirements, and
competition are usually hard to compare.
Ogunleye
(2002) classified the cause of banks going concern into institutional economic
and political factors as well as regulatory and supervisory inadequacies. While
Ebhodaghe (1995) attributed bank failure to economic downturn, inhibitive
policy environment and management problems.
There
are several ways of classifying ratios and could be based on source of data,
what the ratios are meant to measure and users for whom they are primarily
computed. A study in 1930s and several ones later conclude that failing firms
exhibit significantly different ratio measurements than continuing entities.
Therefore, observed evidence for five years prior to failure was cited as
conclusive evidence that ratio analysis can be useful in the prediction of
failure. For many years Nigerian banking system has been experiencing spate of
financial distress which from time to time lead to failure of number of banks
with attendant capital loss, employment loss and socially undesirable
consequences. It is therefore desirable to find a way of detecting deteriorate
financial conditions of Nigerian banks.
Predicting the financial failure of deposit money banks is one of the
main topics that many international institutions have dealt with, due to its
negative impact on companies, investors and the economy as a whole. The
importance of financial forecasting also lies in helping decisions makers to
take the appropriate decisions as far as financing is concerned. In addition to this, this latter helps reduce
the degree of uncertainty as it provides an evaluation of the potential risk
that may happen in the future.
It
is on this argument that this work lies to assess the roles of financial ratios
in predicting banks going concern in Nigeria.
With the
current political and
economic difficulties in
Nigeria, banks are
invariably subjected to pressure and
stress which in
effect has constituted a
threat to the
corporate existence of
these businesses which
if not properly managed
could lead to total
failure. As such, banking sectors became
a battlefield for
survival of the
fittest with banks being
forced to assume
greater risks and this makes the
banks particularly prone to failure. Financial
ratio analysis is
used to compute,
analyze, predict the continuity of banks. It is against this background that the
researcher intends to fill this gap. The main aim is to highlight the roles of
financial ratios in predicting banks going concern.
The problem
of the study Highlights the need
of many parties such as investors, lenders and
auditors, and others,
to see the bank's ability to survive
and continuity away
from failing due to
the negative impact
of distress banks on
the national economy and the
consequent of many problems given the
multiplicity of uses of financial ratios, it is
useful to know any
of these ratios which, if used together can give an
accurate prediction from the
failures of banks before it occurs
in a period of time
to help the banks to take
appropriate action and
possible solutions before it is too
late.
In
view of the above stated problems, this research is embarked upon to identify
the roles of financial ratio in predicting banks going concern of Nigeria
Deposit money banks.
The
main aims and objective of this study is
to examine the roles played by financial
ratio analysis in predicting going concern in the Nigerian banking sector. And the specific objectives
are to;
i.
measure the effectiveness of financial
ratios in financial statements analysis of deposit money banks in Nigeria.
ii.
determine how financial ratios can be used
to predict the continuity of deposit money banks in Nigeria.
iii.
identify the challenges/problems faced by
deposit money banks in Nigeria in using financial ratios in financial statement
analysis.
This
study attempts to find answers to the following questions
- How
effective is financial ratios in financial statements analysis of deposit
money banks in Nigeria?
- Can
continuity of deposit money banks be predicted using financial ratios?
- Is
there challenges/problems faced by deposit money banks in Nigeria using
financial ratios in financial
statement analysis?
A
hypothesis is a tentative and probable explanation of relationship between two
or more variables that create a state of affairs or phenomenon. In view of
this, the following hypotheses were formulated to guide the study.
H1:
financial ratios are not effective in financial statements analysis of deposit
money banks.
H2:
financial ratios cannot be use to predict the continuity of deposit money banks
in Nigeria.
H3:
There are no challenges/problems faced by deposit money banks in Nigeria in
using financial ratios in financial statement analysis
1.6 Scope of the Study
The
scope of this study was centered on the role of financial ratios in predicting
banks going concern. The analysis covers the trend analysis and industry
average, it will consider the analysis of outsiders with the use of published
financial statements i.e. statement of financial position and statement of
comprehensive income of some selected banks and it covers a period of five
years (I.e from 2016 -2020).
1.7
Significance of the Study
The
researcher believes that this research will be very significance to some
parties which include;
The
management of deposit money banks in Nigeria may stands to benefit from the
findings of the research that the study would prompt them on roles of financial
ratios in predicting banks going concern.
It
also hoped that the study may be important to government and its agencies
particularly those established to regulate to oversee the activities of deposit
money banks in Nigeria as it would help them to know the role of financial
ratios in prediction of strength and continuity of banks.
The
research would also be of importance to future researchers as it would be a
guide for further research in extending the frontiers of knowledge. It would
add to the knowledge reservoir in the library. It would form reference material
to other students in the field of study.
1.8
Definitions of Key Terms
Bank:
A bank is a financial institution that is licensed to accept deposit from the
public and creates a demand deposit while simultaneously making loans
Deposit:
A sum of money paid into a bank.
Financial Ratios: Financial ratios are created with the use of
numerical values taken from Financial statements to gain meaningful information
about a company. The numbers found in the company's financial statement, income
statement, balance sheet, cashflow statement are use to perform quantitative
analysis and interpretation thereby assessing a company's liquidity, leverage,
growth, margins, profitability, valuation and so on.
Going Concern:
The assumption is that the business unit will operate in perpetuity; that is
the business is not expected to be liquidated in the foreceable future. A
business is considered a going concern if it is capable of earning reasonable
net income and there is no intention or threat from any source to curtail
significantly in line of business in the foreceable future.
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