THE EFFECT OF RATIO ANALYSIS IN INVESTMENT DECISION (A STUDY OF FIRST BANK NIGERIA PLC.)

ABSTRACT

 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.

v It should maximize the shareholder’s wealth and help to choose among mutually exclusive projects.

v It should be a criterion which is applicable to any conceivable investment project independent of others.

v It should be a measure of the projects profitability by considering all cash-flows.

v It should provide a means of distinguishing between acceptable and unacceptable projects.

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

CHAPTER ONE

1.0      Introduction                                                       

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                                    

1.8      Definition of Major Key Terms                 

CHAPTER TWO

2.0      Literature Review                                                       

2.1      Accounting Information                                            

2.2      Nature of Ratio Analysis                                        

2.3      Users of Accounting Ratios                                     

2.4      Critical Review of the Types of Ratio                      

CHAPTER THREE

3.0      Research Methodology                                             

3.1      Introduction                                                                

3.2      Study Population                                                 

3.3      Sampling                                                                   

3.4      Data Collection                                                           

3.5      Description of Questionnaire                                    

3.6      Method of Data Analysis                           

3.7      Description of Data Collection Instrument                

3.8      Analytical Procedure                                             

3.9      Limitation to the Methodology                                   

CHAPTER FOUR

4.0      Presentation and Analysis of Data                            

4.1      Procedures                                           

4.2      Hypothesis Testing                             

4.3      Results Obtained and Interpretation            

CHAPTER FIVE

5.1      Summary                                                        

5.2      Recommendation                                                      

5.3      Conclusion                                                             

Bibliography                                                              

Appendix                                                            

CHAPTER ONE

INTRODUCTION

1.1                        BACKGROUND 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

                                         Sales           1

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 itself.

1.2                        STATEMENT 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:

           i.                     General economic depression in the country.

         ii.                     Anticipate and general instability in the political climate

       iii.                     Introduction of Second – Tier foreign exchange market.

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.

1.3                        PURPOSE OF STUDY

The purpose of this project is to serve the following purpose:

     i.               To highlight the problems faced in the of ratio analysis for investment decision in real business life.

   ii.               To enable users of financial statements understand the techniques of analyzing final accounts in First Bank.

 iii.               To analyze and interpret the trends and ratios of a company.

iv.               To suggest other investment in practical terms.

  v.               To determine companies contribution to social development.   

1.4                        SIGNIFICANCE 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 competitors.

More so, the importance of the study also comprises of the following:

           i.            It is used in determining the financial strength and weakness of a company, thus allowing for necessary corrective action.

         ii.            Ratio analysis is used in interpreting the future prospect of the company.

       iii.            It can be used to determine liquidity position of the company.

      iv.            It is used in determining management efficiency in the use of available company resources.

        v.            Ratio analysis is used in determining availability and adequacy of company’s capital.

      vi.            It is used in making positive comparison between past and prevent operational situation of the company and obvious projection to the future.

1.5                        SCOPE 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 auditing.

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 analysis are:

        i.                  The problem of currency and accuracy, Balance sheet items are historical and duration of usefulness is limited.

      ii.                  Problems of determining proper and acceptable basis of comparison.

    iii.                  Changes in price level render interpretation of ratio invalid

   iv.                  The comparison made between different company’s ratios is in accurate because of different in their policies, operations and situations.

     v.                  The ratios calculated suffer setback from short term – changes

1.6                        RESEARCH QUESTIONS

In the course of this study, various research questions would be put forward; these are in live with the topic under research. These include:

1)             What is the benefit of Investment Decision?

2)             Is ratio analysis the right-guided tools for any entity to make best decision making on investment?

3)             Can ratio analysis judge the performance of a country?

4)             Can ratio analysis assist creditors to determine First Bank ability to meet their liabilities as at when they fall due?

5)             Can ratio analysis help both current and potential investors to determine the company’s present and expected future earning and stability of such earning?

1.7                        RESEARCH HYPOTHESES

In this project the following are the hypothesis tested.

Hypothesis One

Ho:     There is no relationship between investment decision-making and ratio analysis.

Hi:       There is relationship between investment decision-making and ratio analysis.

Hypothesis Two

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 

Hypothesis Three                                                                 

Ho:     Ratio analysis does not improves management decision on investment.

Hi:       Ratio analysis improves management decision on investment.

1.8                        DEFINITION OF MAJOR KEY TERMS

The following are the major terms used:

        i.            RATIO ANALYSIS: The ratio analysis could be described as the analysis of financial statement in order to judge the performance of the company or group companies.

      ii.            INVESTMENT DECISION: The investment decision means the allocation of funds to investment proposals whose benefits are to be realized in the future.

    iii.            FINANCIAL 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.

   iv.            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.

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