IMPACT OF RATIO ANALYSIS AS A TOOLS FOR INVESTMENT DECISION

CHAPTER ONE

1.1    INTRODUCTION

The Term “Ratio Analysis” could be described as the analysis of financial statement in order to judge the performance of the COMPANY or group of companies.

The “Investment Decision” Means the allocation of funds to invest proposal 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 impact of ratio analysis as a tool for investment Decision. The three fundamental statement requires are the income statement, the balance sheet, and the statement of changes in financial position. The analysis of these statement combined with the preparation and analysis of related financial statement are required to as financial statement analysis.

To make rational decision in keeping with the objective of a firm, the financial management his certain analytical tools. The company itself and suppliers of capital, creditor and investor all undertake financial analysis. The form’s purpose is not only internal control but also better understanding of what capital supplier seek in financial condition and performance from it. To evaluate, the financial analyst needs certain Yardsticks frequently used in ratio or index relating two pieces of financial data each other. For instance, the relationship between gross profit and sales is expressed by the accounting ratio know as gross profit % or gross margin, which is computed as follows.

GROSS PROFIT %  = Cross profit    x    100    =  x%

Sales                    1

1.2 HISTORY OF THE ORGANIZATION

The company was incorporated in Nigeria as P.B. Nicholas and Company Limited on 04 December 1948 with an authorized share capital of å40.000 divided into 40,000 ordinary share of å1 each. The name of the company was changed to Alagbon Industries Limited in 1953 and to Associated Industries Limited in 1960. The company became a public limited liability company and had its shares subdivided into ordinary share of 50 kobo each on 19 July 1972, following which its shares quoted on the Exchange in the same year. The company’s current name was adopted on 22 November 1990 as Paterson Zochonic Industries Plc.

The principal activities of the group are the manufacturing and sales of wide range of consume products and home appliance. Their products include detergent soap, pharmaceuticals cosmetics, confectionaries, refrigerators, freezen, Air conditioners, plastic container and components. The activities which claims about 85 – 90% of Merchandising.

1.3    STATEMENT OF THE PROBLEMS

Many Businesses all over the World have met with unit health due to investment decision. This has been situation more serious in recent time in Nigeria due to the following reason.

i. General economic depression in the country.

ii. Anticipated and general instability in the political climate.

iii. Introduction of second-tier foreign exchange market.

iv. Ratio computed from financial statement can based on historical figures which will need further analysis especially during the period of rising prices.

v. To much emphasis can be place on one ratio whereas ratio are interdependent and has to be treated as such.

vi. Lack of professional knowledge to interpret the computed ratio.

vii. Seasonal activities of business will affect ratio analysis.

However, the basic solution to over come this problems (investment decision) is how to make the right decision at the right time through the proper use of ratio analysis in the interpretation of financial statement, investment decision will be made easy.

The analysis and interpretation of various ratio should force experience, skilled analyst a better understanding of financial condition and performance of the firm they would obtain from analysis of financial data alone.

1.4    PURPOSE OF THE STUDY

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

ii. To enable users of financial business statement understand the techniques of analyzing final account

iii. To analyse and interpret the trends and ratio of a company.

iv. To suggest other investment in practical terms.

v. To determine companies contribution to social development

1.5    SCOPE AND LIMITATION OF STUDY

The scope of the study will cover the uses of ratio analysis with particular reference to the accounting system in the company.

PZ Nigeria LTD will be thoroughly examined as a case study. the study shall be limited to the financial accounting segement of accounting. There are others areas of accounting and such as management accounting, financial accounting and auditing.

However, the focus in thus study will be in financial accounting as this the area in which ratio analysis is most significant. Some of the factor that contributes to the limited of ratio analyses are:-

i. The problem of currency and adequacy. 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 ratio calculated suffer set back from short changes.

v. The comparison made between different company’s ratio are in accurate because of different in their policies operation and situation.

1.6    SIGNIFICANCE OF THE STUDY

i. It is use to determine the financial strength and weakness of a company, this allowing for necessary corrective action.

ii. Ratio analysis are used in interpreting the function 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 are used in determining availability and adequacy of company’s capital.

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

vii. It will assist interested investor in their investment decision. In that it will correctly analyse the gearing solvency and growth potential of the company.

viii. It will help the management in evaluating the performance through the comparison of different ratio with the company’s previous accounting result (trend analysis)

1.7    DEFINITION OF MAJOR TERMS  

The following are the major term uses:

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

ii. INVESTMENT DECISION: The investment means the allocation of fund 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, portability, liquidity and solvency.