The purpose of this
research project was to find out how financial statement analysis service of
our aid to meaning decision by investment firms in Enugu state. Financial statement analysis are used by
investment firms to make their investment decisions. They are also used by management to make
their decisions. Some of the ratio
commonly computed by investment firms are profitability ratios, liquidity
ratios. Market value ratios leverage
ratios and ordinary share ratios.
This research project was embarked on because most
investment firms do not implement meaningful decision that will enhance their
meaningful opportunities. Moreover, most
investment firms do not study investment opportunities as to understand the
risk associated with investment proposals as to make meaningful decision based
on that before investing their resources.
The methodology used in this work include subheadings like
research decision, sampling procedure, data collection and method of data
analysis as well as statistical tool of analysis.
The method of research design that was adopted in this
study is the sample survey through the administering of questionnaire to
investment firms. I was discovered that
making investment decisions using financial statements analysis would very
significantly with the profitability of the investment firms.
This is so because using chi-square to test our
hypothesis. We discovered that the
tabular value of 3.841 is less than our calculated value of 7.815.
We equally accepted the second test in the alternative
hypothesis which stats that “there is significant relationship between decision
computing with chi-square (X2) we had 3.841 while the tabular value
Thirdly, we also accept our alternative hypothesis in our
third hypothesis which states that “There is significant relationship between
investment decision and investment profitability because from calculated X2
we had 9.483 in the tabular value.
Lastly, we made recommendations to both investors and
management in investment firms on how best to utilize financial ratios in
making meaningful investment decisions.
TABLE OF CONTENTS
Title page i
Table of contents vi
1.1 Statement of
Purpose of the study
Statement of Hypothesis
Significance of the study
Scope and limitation of study
Operational definition of Terms
Review of related literature
2.1 Review of
The profit and loss Account or income statement
Notes to the financial statement
Statement of source and application of fund
Objectives/usefulness of financial statement
The need for Analysis of financial statement
Users of Analysis of Financial statement
Limitations of financial ratios analysis
Data Analysis Technique and statistical test
PRESENTATION, INTERPRETATION AND ANALYSIS OF DATA
Statistical test of the hypothesis
SUMMARY OF FINDINGS, RECOMMENDATION AND CONCLUSION
5.1 Summary of
Decision making is not
the core of every investment activity. A
decision is a choice between two or more alternatives. The implementation of meaningful decision
gives way for achievement of investment goals and objectives while
implementation of wrong decision positively give rise to investment failure.
The ultimate objectives
for investment are profit maximization and growth thus it becomes necessary
that capital decision have to be made and implemented so as to achieve the
For a meaningful decision
that will be used in these objective for an investment to be made available,
analysed and studied and through what is derived, decision is made and
implemented wither for action, execution or corrective measures where
One of the important
information needed about investment is concerned with financial aspect and the
record that contains the financial aspect of an investment is what is referred
to as analysis of financial statement referred to as analysis of financial
According to financial
statement analysis and interpretation for alert investors by C. Chinelo Ikoku,
financial statement components are as follows:
The chairman board of directors report
The auditor’s report
Graphs and figures.
Table of accounting date.
Financial analysis via ratios
hence it is sometimes referred to as ratio analysis or accounting ratios
analysis interpreting investigation into financial statement. The ratios derived from financial statements
are used in three different ways namely:
Time series analysis
Gross sectional analysis.
executions, decision such as buy, certain or sell are necessary. Equally, decision for evaluating management
performance, as well as current and future level of risk and profitability is
all important. Meaningful decision in
all the above mentioned areas will help for a good choice among available
portfolio of assets, dividend yield, total return as well as liquidity.
In this project study,
concentration will be based on such financial ratio as:
Asset management ratio
Market value ratio
OF THE RESEARCH PROBLEMS
investors are know to have entered into investment ventures without property
understanding such investment opportunity, thus making and implementing wrong
decision thereby ending up in folding up when the going proved impossible. At times when the investment activities go
on, the aim for such action not realized.
Investment failures have equally been
identified with poor management, which arises as a result of mobility of the
management of such investment firms in making meaningful decisions required for
such investment opportunity.
Many investment are carried out
without emphasis laid on those investments that would generate profitable returns
in the future, the risk involved and the benefits to be derived if embarked
upon given the scare financial resources and the resultant effect of
failure. Such set back is the life of an
investor and in the case of investment firms, liquidation.
All the above stated problem arises
as a result of wrong decision making
hence, this study will therefore, identify the means through which meaningful
decision can be derived as to enhances the changes available for investment
entities or firms through analyzing information concerning such investment
Investment failures have
been identified with poor managerial and investors decision approach, which
arises as a result of poor knowledge
about an investment as to help in making meaningful decisions for
investment purpose and realization of goals.
This study intends to
find out the following:
How analysis of financial statement can help in making
meaningful decision, which will enhance investment structure and goal realization
To ascertain the different decision bench marks
employed by investment
To demonstrate the interpretation of computed ratios.
Investment failure has
been so pronounced in the recent times.
In the process, capitals are lost and set backs experienced as a result
of low return to stockholders and in some cases complete liquidation. In this study therefore, the researcher
intends to find out how analysis of financial statements will aid in making
meaningful decision that will enhance investment chances in realizing
objectives to convert loss of capita and set backs experiences or total
The dimension that this
research will cover will be based on the following questions, which will help
in increasing an insight into the problems under investigation.
To investment failure arise from implementing wrong
Does poor decision implementation cripple investment
Are decision derived from analyzing financial
Does poor management arise from inability to evaluate
or analyzed investment opportunities?
To what extent are decisions derived from financial
To what extent is decision derived from analysis of
financial statement used?
How does investment firms make their decision?
Do investment proposals require analysis or evaluation
to be made on them?
1. HO: Using analysis of statement while
making investment decision will not very significantly with the probability of
Hi: Using analysis of statement white
making investment decision will vary significantly with the probability of the
2. HO: There is no significant relationship
between investment decision and analysis of financial statements.
There is significant relationship between investment decision and
analysis of financial statements.
There is no significant relationship between investment decision and investment
There is significant relationship between investment decision and investment
OF THE STUDY
It is hope of the
researcher that the findings and recommendations of this project work will be
of great importance to many interested persons.
The significance of the study will include the following.
It will serve useful purpose to investors, the
importance of making meaningful investment decisions through analyzing
financial statement of an investment at any point in time,.
To create in investors the awareness of the risk
associated with a particular investment as it can be revealed through analysis
of financial statements of such investment thus celling for proper decision
Expose investors to the benefit derived in making
meaningful decision among alternatives that will be of goal outcome for an investment
To expose investors to awareness on how the set backs
and bitter experienced witnessed from investment failure can be totally
eradicated through implementation of meaningful decision
LIMITATION OF STUDY
This research work will
be conducted among selected investment firms in Enugu state. The localization of the study is informed by
the financial constraints on the part of the researcher. The study has also been subjected to time
constants because it was carried out
single handedly by the researcher.
Bureaucracy as practiced by the firms and dearth of relevant information
constituted impediment and limitations in themselves.
DEFINITION OF TERMS
To enhance a proper
understanding of this research work, the following technical terms have been
There is a deliberate
though process that leads to the taking of action. Decision making is used essential in
execution of both long and short term plans.
Relevant information for decision making must be expressed in forms of
financial or quantitative analysis in order that a rational choice can be made.
is records that contains financial reports of an investment or business entity.
is ratio that can be calculated form an investment financial statements which
enhance our understanding financial statements which enhance our understanding
of investment financial performance and position
measure the ability of the firm to meet its obligations as they become
due. The liquidity ratios by
establishing a relationship between cash and other current assets to current
obligations provide a quick measure of liquidity. An excess liquidity will result in bad credit
raking and loss of confidence by creditors.
is computed by dividing current assets by current liabilities current assets
include cash marketable securities, accounts receivables and inventories. Current liability consist of accounts payable,
notes payable, accrued income and taxes short-term loans etc.
Leverage ratios measure the funds
supplied by the owners of the business as compared to the finance provided by
the firms creditors. As a general rule,
there should be an appropriated mix of debt and equity in financing the firm’s
assets. From the creditor’s point of
view, a higher incidence of owner financing is desirable because investors look
to firms equity stock for security in the event of liquidation. On the part of the owners of the firm, a
higher incidence of creditor financing is desirable. If borrowed funds can be used by the business
to generate earnings in excess of interest charges on those funds, then
borrowing has benefited the owners.
Leverage is approached in two
ways. One approach examines balance
sheet ratios and determines the extent to which borrowed funds have been used
to finance the firm. The other measures
the risk of debt by income statement ratios designed to determine the number of
time fixed charges are covered by operating profits. Firms with low leverage ratios have less risk
of loss when the economy is in a down turn, but they have lower expected
returns when the economy booms. Conversely, firms with high leverage ratios run
the risk of large losses but also have a chance gaining high profit.
TOTLA DEBT TO TOTAL EQUITY
is a measure of the relative claims of creditors and owners against the firms
assets. The ratio considers both current
liabilities and non current liabilities in the numerator. The stake of the owners in the business
vis-à-vis that of creditors must take control of the business with high sense
TIME INTEREST EARNED RATIO
It measures the degree to which earnings can
decline without resultant financial problem to the firm because of its
inability to meet interest cost.
ratios are employed to evaluate the efficiency with which the firm manages and
utilizes its assts. The activity ratios
involve a relationship between sales and various assets. A proper balance between sales and assets
generally reflects that assets are managed very efficiently.
TOTAL ASSETS TURNOVER
measures the capacity with which total assets are utilized to generate the
firms turnover. It is calculated by
dividing sales by total assets.
CAPITAL EMPLOYED TURNOVER
capital employed is the permanent or long run funds entrusted to the firm by
the creditors and owners.
ratios examine how effectively the firm is being managed. The managers, creditors, shareholders, as
well as the employees of the firm are interested in the profits of the
firm. It assess the economic condition
of an investment. It shows profitability
in relation to investment . they
indicate efficiency of operation.
GROSS PROFIT MARGIN
margin is used to evaluate the spread between sales revenue and the cost of
goods sold. It is computed by diving
gross profit by turnover.
NET PROFIT MARGIN
ratio measures the management efficiency in the administration of the
business. It is used to determines the
return on per Naira of sales.
RETURN ON CAPITAL EMPLOYED
measures how well the management has utilized funds supplied by the
shareholders and creditors.
RETURNS ON TOTAL ASSETS:
measures the rate of efficiency with which the firm has employed its assets for
purposes of making profit.
EARNING PAY-OUT RATIO
is the ratio that represents the position of investment earnings that is paid
as dividend to shareholders.
measurement of return on investment.
are firms associated with commitment of resource for gains actualization
RETURN ON INVESTMENT
measures the efficiency with which an investment has utilize the total fund
available in generating profit.
capital refers to a firm’s investment in short-term assets-cash, marketable
securities, trade debtors and stock, less current liabilities used to finance
the current assets. Working capital
management therefore means the planning and controlling of both current assets
and current liabilities. It involves the
administration of cash, receivables, inventories marketable securities and the