ABSTRACT
This
study is aimed at examining the significance of financial statement analysis on
investment decision, i.e. the important roles it plays in identifying the
strength and weaknesses in the operations of a business entity as well as how
it keeps users informed about the financial status of the reporting entity. The
Model employed in this study is the Square Model concept developed by Professor
Thomas Polesie (1991) which gives a simple overview of a company’s financial
situation at a given point in time. The Square Model is a closed model built on
accounting terms and the borders of the square illustrates the relations
between the financial measures from the balance sheet and the income statement
Findings
to this study reveals that many investors are known to have entered into investment
ventures without properly understanding the profitability and solvency
situation, thus making and implementing wrong decision. They adpot various techniques
which cannot be associated with wise investment decision and loose their
investment afterwards.
Both
primary and secondary data shall be the basis of this research work. The
primary data shall be generated by means of a well-structured questionnaire
instrument to ensure objectivity of findings. The secondary data will also be
collected from textbooks, journals and other relevant publications.
It
is however recommended that investors should ensure that financial statement
used during ratio analysis are compared with the accounting policies applied
and companies should adopt financial reporting strategies that are practical
and understandable to potential investors. On the same line, other factors such
as industry trends, changes in technological development, consumer tastes and
changes within the firm should be considered when making judgment about the
future of an organization. Financial literacy is the key to savings and
investing (Norman 2003).
TABLE OF CONTENTS
Title Page i
Certification Page ii
Dedication Page iii
Acknowledgement Page iv
Abstract v
Table of content vi
Chapter One: INTRODUCTION
1.1 Background to the study 1
1.2 Statement of the Problem 3
1.3 Aim and Objective of the study 3
1.4 Relevant Research Questions 4
1.5 Relevant Research Hypothesis 4
1.6 Significance of the Study 5
1.7 Scope of the Study 5
1.8 Definition of Terms 6
Chapter Two: LITERATURE REVIEW AND
THEORETICAL FRAMEWORK
2.1 Preamble 12
2.2 Theoretical Framework of the study 12
2.3 Empirical Review of Previous Work 15
Chapter Three: RESEARCH METHODOLOGY
3.1 Preamble 50
3.2 Research Design 50
3.3 Population of
the Study 50
3.4 Sampling,
Procedure and Sampling Size 51
3.5 Data Collection
Instrument and Data Validation 51
3.6 Method of Data Analysis 51
3.7 Limitation of
the Methodology 51
Chapter Four: DATA PRESENTATION AND ANALYSIS
4.1 Preamble 54
4.2 Presentation and Analysis of Data According to Research Questions 54
4.3 Test of Hypothesis 63
4.4 Discussion of Finding 63
Chapter Five: SUMMARY, CONCLUSION AND
RECOMMENDATION
5.1 Summary of
Findings 67
5.2 Conclusion 69
5.3 Recommendations 70
Bibliography
(American Psychological Association (APA) Style) 72
APPENDIX
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND TO THE
STUDY
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 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 aforementioned objectives.
Investment
decision in this context refers to both short term and long term reallocation
of funds. Short term investment decision include the level of current asset
(cash, debts and inventories) necessary for day to day operations whereas long
term investment decision refers to fixed asset purchase, mergers, acquisition
and corporate re- organization.
Financial
statements provide the information to the analysts predicting fundamental value
of the organization. Users must understand what the numbers of statements are
saying and which numbers are showing red flags.
Financial
Statement Analysis is a process by which analytical tools and techniques are
applied to financial statements and related data to derive estimates and hints,
which are necessary to make important business decisions. (Bernstein L.A,
2004). It is both a screening and a
forecasting tool crucial for selecting investment or merger candidates and
forecasting future conditions and consequences. It is also a diagnostic and
evaluation mechanism in assessing financing, investing, and operating
activities for managerial and other business decisions. FSA diminishes our
uncertainty in decision making and establishes an effective and systematic
basis for making business decisions
The
Companies and Allied Matters Act 1990 gives a list of those statements that
makes up the financial statement and they are as follows:
1.
Statement
of Accounting policies
2.
Profit
and Loss or income statement
3.
Balance
Sheet
4.
Notes
to the Account
5.
Auditors
Report
6.
Directors
Report
7.
Cash
Flow Statement
8.
Value
Added Statement
9.
Five
year financial summary
Financial
analysis via ratios 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:
1.
Structural
analysis
2.
Time
series analysis
3.
Cross
sectional analysis.
For investment 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:
a.
Profitability
ratio
b.
Liquidity
ratio
c.
Long
Term solvency and stability ratio
d.
Market
value ratio
1.2 STATEMENT
OF THE PROBLEM
It
has been observed that as a result of people’s inability to analyze a company’s
financial statements; they more often than not ‘invest blindly’. In efffect,
people buy into companies without knowing its fianancial health status . This
is largely due to poor understanding and interpretation of financial records
and in most cases, people that can analyze financial statements do not take the
pain to do the necessary home work before investing, they adpot various
techniques which cannot be associated with wise investment decision and loose
their investment afterwards.
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.
Consequently, this study seeks to find out tools that will aid in making meaninful
decision thereby opening investors eyes to the role of financial statements analysis
in that regard.
1.3 AIMS AND OBJECTIVE OF THE STUDY
The main objective of
this study is to examine the impact of financial statement analysis on decision
making while the specific objectives are:
a) To identify how financial statement analysis can help in making meaningful
decision, which will enhance
investment structure and goal realization
b) To
demonstrate the interpretation of computed ratios.
c) To
ascertain the different decision bench marks employed by investment
d) To
identify factors to be considered before choice of investment
e) To identify and explain the relationship between financial
statement analysis and investment decision.
1.4 RELEVANT
RESEARCH QUESTIONS
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.
1) How
does the analysis of financial statement influence investment decision?
2) Do
ordinary investors understand the use of financial ratios?
3) Do
investment proposals require analysis or evaluation to be made on them?
4) Does
ratio analysis facilitate proper understanding of the financial statement?
1.5 RELEVANT
RESEARCH HYPOTHESIS
Ho: There is no significant relationship between investment decision and
financial statement analysis.
H1:
There is significant relationship between investment decision and
financial statement analysis.
1.6 SIGNIFICANCE OF THE STUDY
The researcher hopes 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.
a. 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,.
b. To create an awareness of the risk associated
with a particular investment as it can be revealed through analysis of
financial statements of such investment thus calling for proper decision making
c. Expose investors to the benefit derived in
making meaningful decision among alternatives that will be of goal outcome for
an investment
d. To expose investors to awareness on how the
setbacks and bitter experienced witnessed from investment failure can be
totally eradicated through implementation of meaningful decision.
1.7 SCOPE
OF THE STUDY
This research work will be conducted among
selected investors on the Nigerian Stock Exchange (Lagos). 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. Hoarding and dearth of relevant information
constituted impediment and limitations in themselves.
1.8 DEFINITION
OF TERMS
To enhance a proper
understanding of this research work, the following technical terms have been
defined.
A.
DECISION MAKING
There is a deliberate 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.
B.
FINANCIAL STATEMENT
This is records that contains financial
reports of an investment or business entity.
C.
LIQUIDITY RATIOS:
They 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.
D.
CURRENT RATIO
This is computed by dividing current assets
by current liabilities current assets include cash marketable securities,
accounts receivables and inventories.
E.
LEVERAGE RATIONS:
Leverage ratios measure the funds
supplied by the owners of the business as compared to the finance provided by
the firms creditors.
F.
TOTLA DEBT TO TOTAL EQUITY
This is a measure of the relative claims of
creditors and owners against the firm’s assets.
G. 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.
H. ACTIVITY
RATIOS:
These 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.
I.
TOTAL ASSETS TURNOVER
It measures the capacity with which total
assets are utilized to generate the firms turnover. It is calculated by dividing sales by total
assets.
J.
CAPITAL EMPLOYED TURNOVER
The capital employed is the permanent or long
run funds entrusted to the firm by the creditors and owners.
K. PROFITABILITY
RATIO
These 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.
L.
GROSS PROFIT MARGIN
This 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.
M. NET
PROFIT MARGIN
The ratio measures the management efficiency
in the administration of the business.
It is used to determines the return on per Naira of sales.
N.
RETURN ON CAPITAL EMPLOYED
It measures how well the management has
utilized funds supplied by the shareholders and creditors.
O. RETURNS
ON TOTAL ASSETS:
It measures the rate of efficiency with which
the firm has employed its assets for purposes of making profit.
P.
EARNING PAY-OUT RATIO
This is the ratio that represents the
position of investment earnings that is paid as dividend to shareholders.
Q. EARNING
YIELD
This is measurement
of return on investment.
R.
INVESTMENT FIRMS
These are firms associated with commitment of
resource for gains actualization.
S.
RETURN ON INVESTMENT
This measures the efficiency with which an
investment has utilize the total fund available in generating profit.
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