This study dwells on The Effect of Ratio
Analysis in Investment Decision in First Bank Nigeria Plc. The study begins
with Chapter One to Chapter Five. Data were collected through questionnaire
distributed to the workers. Percentage analysis and chi-square (X²) statistics
test were also employed in data analysis. The study reveals that the effectiveness
of ratio analysis in business decision making determines the level of liquidity
and profitability of business, also improves management decision on investment
and that there is a relationship between investments and that there is a
relationship between investment decision making and ratio analysis.
However, it is recommended that since it
is not possible for a company not to invest in capital project, it is advisable
that in using any particular method of investment appraisal technique, the
method should possess the following characteristics.
should maximize the shareholder’s wealth and help to choose among mutually exclusive
should be a criterion which is applicable to any conceivable investment project
independent of others.
should be a measure of the projects profitability by considering all
should provide a means of distinguishing between acceptable and unacceptable
It is my hope that by the time the
various investment appraisal techniques enumerated above shall be examined, I
shall have succeeded in highlighting the importance and relevance of good
appraisal technique to the success of any business organization especially
profit oriented company.
TABLE OF CONTENTS
1.1 Background of the Study
1.2 Statement of the Problems
1.3 Purpose of Study
1.4 Significance of the Study
1.5 Scope and Limitation of Study
1.6 Research Questions
1.7 Research Hypothesis
of Major Key Terms
2.0 Literature Review
2.1 Accounting Information
2.2 Nature of
2.3 Users of Accounting Ratios
2.4 Critical Review of the Types of Ratio
3.0 Research Methodology
3.2 Study Population
3.5 Description of Questionnaire
3.6 Method of Data Analysis
3.7 Description of Data Collection
3.8 Analytical Procedure
3.9 Limitation to the Methodology
4.0 Presentation and Analysis of Data
4.2 Hypothesis Testing
4.3 Results Obtained and Interpretation
OF THE STUDY
This study will discuss the basis of the
effect of ratio analysis as a tool for investment decision (using First Bank as
a case study). According to Aminu Nurudeen (2000) the term “Ratio Analysis”
could be described as the analysis of financial statement in order to judge the
performance of the companies.
Omolumo (2000) described “investment
decision” as a means of allocation of funds to invest proposals whose benefits
are to be realized in the future.
The combination of the two terms
described above or the relationship between them is basically the purpose of
this work. That is the effect of ratio analysis as a tool for investment
decision. The three fundamental statements required are the income statement,
the balance sheet and the statement of changes in financial position. The
analysis of these statements combine with the preparation and analysis of
related financial statements are referred to as financial statement analysis.
To make rational decision in keeping
with the objectives of a firm, the financial management has certain analytical
tools. The company itself and suppliers of capital, creditors and investors all
under take financial analysis. The firm’s purpose is not only internal control,
but also better understanding of what capital suppliers seek in financial
condition and performance from it.
To evaluate, the financial analyst needs
certain yardstick. The yardstick frequently used is a ratio or index relating
two pieces of financial data to each other. For instance, the relationship
between gross profit and a sales is expressed by the accounting ratio known as
gross profit % or gross margin, which is computed as follows:
Gross profit % = Gross
profit x 100
As a result of the sophisticated
business environment we operate in, it is highly necessary that ratio analysis
should be given good consideration .This goes a long way to compliment
investment decisions. For investment to really make worth or to meet the target
set by the investor there would be need for ratio diversification. The
investors need to strategize as the situation in the business environment presents
OF THE PROBLEMS
Many business all over the world have
met with untimely death due to investment decisions. This has been more serious
in recent time in Nigerian due to the following reasons:
General economic depression in the country.
Anticipate and general instability in the
Introduction of Second – Tier foreign
However, the 3 basic solutions to
overcome this problem (investment decision) are how to make the right time.
Through the proper use of ratio analysis in the interpretation of financial
statement, investment decision will be made easy.
The purpose of this project is to serve
the following purpose:
To highlight the problems faced in the of
ratio analysis for investment decision in real business life.
To enable users of financial statements
understand the techniques of analyzing final accounts in First Bank.
To analyze and interpret the trends and
ratios of a company.
To suggest other investment in practical
To determine companies contribution to social
OF THE STUDY
With the help of this study, management
of organization will be able to compare the performance over the past years
with selected market profitability objectives and with the performance of
More so, the importance of the study
also comprises of the following:
It is used in determining the financial
strength and weakness of a company, thus allowing for necessary corrective
Ratio analysis is used in interpreting the
future prospect of the company.
It can be used to determine liquidity
position of the company.
It is used in determining management
efficiency in the use of available company resources.
Ratio analysis is used in determining
availability and adequacy of company’s capital.
It is used in making positive comparison
between past and prevent operational situation of the company and obvious
projection to the future.
AND LIMITATION STUDY
The scope of the study will cover the
uses of ratio analysis with particular references to the accounting system in
First Bank Nigeria Plc; will be thoroughly examined as a case study.
The study shall be limited to the
financial accounting segment of accounting. There are others areas of
accounting and such as management accounting, financial accounting and
However, the focus in this study will be
financial accounting as this is the area in which ratio analysis is most
significant some of the factors that contribute to the limitation of ratio
The problem of currency and accuracy, Balance
sheet items are historical and duration of usefulness is limited.
Problems of determining proper and acceptable
basis of comparison.
Changes in price level render interpretation
of ratio invalid
The comparison made between different
company’s ratios is in accurate because of different in their policies,
operations and situations.
The ratios calculated suffer setback from
short term – changes
In the course of this study, various
research questions would be put forward; these are in live with the topic under
research. These include:
What is the benefit of Investment Decision?
Is ratio analysis the right-guided tools for
any entity to make best decision making on investment?
Can ratio analysis judge the performance of a
Can ratio analysis assist creditors to
determine First Bank ability to meet their liabilities as at when they fall
Can ratio analysis help both current and
potential investors to determine the company’s present and expected future
earning and stability of such earning?
In this project the following are the
Ho: There is no relationship between investment
decision-making and ratio analysis.
Hi: There is relationship between investment
decision-making and ratio analysis.
Ho: The degree of ratio analysis does not determine
the level of liquidity and profitability of the business.
Hi: The degree of ratio analysis determines the
level of liquidity and profitability of the business
Ho: Ratio analysis does not improves management
decision on investment.
Hi: Ratio analysis improves management
decision on investment.
OF MAJOR KEY TERMS
The following are the major terms used:
ANALYSIS: The ratio analysis could be described as the analysis
of financial statement in order to judge the performance of the company or
DECISION: The investment decision means the allocation of funds
to investment proposals whose benefits are to be realized in the future.
ANALYSIS: Financial analysis is an act of evaluation and assessing
the financial and operational strength and weakness of a business firm in order
to adequately determine its efficiency, profitability, liquidity and solvency.
FINANCIAL STATEMENT: A financial statement is
a detailed report that shows the management performance and financial standing
of a business firm for a particular period usually for one accounting year.