Introduction
1.1 Background to the Study
Financial information is an essential ingredient for decision making within and outside the organization. Hence every organization (profit and non-profit) that source and utilize funds must of a necessity prepare a statement of account showing detail analysis of movement of funds within the organization during a particular period of time. This information is usually contained in the firm’s financial statements (profit/loss account and balance sheet) shows the true position of the firm as at a particular date and this will assist all relevant stakeholders to gain insight into the operation and performance of the firm. One important goal of the accountant is to report financial information to the user in a form useful for decision making. Most of the language of financial management is rooted in the financial statements.
The financial statements of a firm consist of three main accounts. The balance sheet, the profit and loss account, and the cash flow statements. The balance sheet shows the financial position and accounting value of a firm at a particular date. As a snapshot of the firm, it is a convenient means of organization and summarizing what a firm owns (its assets), what a firm owes (its liabilities), and he difference between the two (the firm’s equity) at a given point in time. The profit and loss account shows the results of operation of this firm over a particular accounting period. The cash flow statement provides information about cash inflows and outflows during an accounting period and separate cash flows into operating activities, investing activities and financing activities. This statement is usually included in a financial statement just to provide additional information that will helps stakeholders in gaining insight into the financial statements. The main components of financial that constitute our analysis and interpretation of financial information of any business organization are the balance sheet and profit and loss account.
Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the balance sheet and the profit and loss account. Financial analysis can be undertaken by management of the firm, or by parties outside the firm, owners, creditors, investors and others (Foster, 1986). One important tool for financial analysis is ratio.
Financial ratio is the relationship between two or more financial data usually expressed as a percentage or in relation to another figure or group of figures in the same financial statement. These ratios are ways of comparing and investigating the relationships between different pieces of financial information. It is also used as a benchmark for evaluating the financial position and performance of a firm. The absolute accounting figures reported in the financial statements do not provided meaningful understanding of the performance and financial position of a firm, such information only conveys meaning when it is quantitatively compared and related to some other relevant information through ration analysis.
The methods are based on tried and true accounting ratios, which have been around for even longer. The theory of financial ratio analysis was first popularized by Benjamin Graham who is considered by many to be the father of fundamental analysis. Benjamin Graham, who from 1928 was Professor at Columbia Business school as well as a very successful investor in his own right, was mentor and teacher to Warren Buffett.
Fundamental analysis, of which financial ratio analysis is but one subset, looks at a company’s financial statements, management, health and position in the competitive landscape to determine a share price valuation. It is different from the other commonly used methods of investment analysis – quantitative analysis and technical analysis – in that it looks from the bottom-up rather than from the top down, or – in the case of technical analysis – from what the charts say:
Performance evaluation of a company is usually related to how well a company can use its assets, shareholder equity and liability, revenue and expenses. Financial ratio analysis is one of the best tools of performance evaluation of any company. In order to determine the financial position of firm.
Fundamental analysis and financial ratio analysis must form the basis of all investment decisions, because without knowing the true financial position of a company you are purely speculating.
1.2 Statement of the Research Problem
The following research questions have been formulated:
- Is financial ratio used to measure the firms performance and profitability?
- Does financial ratio assesses the firm’s ability to meet its maturing obligation?
- Is financial ratio used to determine long term stability and financial strength of the firm?
- What significant effect does financial ratio has on the effectiveness of past key management decision?
- Why is financial ratio used by management and investors to make valid decisions relating to their interest.
1.3 Objectives of the study
Financial ratio is a form of financial statement that is used to obtain a quick indication of a firm’s financial performance in several key areas. However, the following are the essential objectives of financial ratios:
- Assessing the firm’s performance and profitability;
- Evaluate firm’s ability to meet its maturing obligation;
- Determine the firm’s long term stability and financial strength;
- Evaluate the effectiveness of past key management decisions;
- Guide management and investors in making valid decision relating to their interest.
1.4 Hypotheses
Hypothesis is a conjectural statement of the relationship between two or more variables (Agbonifoh and Yomere, 1999). The research topic is fact finding which can be hypothesized in the form of alternate.
Hi: Financial ratio is used to measure the firms performance and profitability.
Hi: Financial ratio assess the firm’s ability to meet its maturing obligation.
Hi: Financial ratio does determine long term stability and financial strength of the firm.
Hi: Financial ratio is used to evaluate the effectiveness of past key management decisions.
Hi: Financial ratio is used as a guide by management and investors in making valid decisions.
1.5 Significance of the study
Essentially, financial ratio is a useful tools which one can infer the financial performance of the enterprise over a period of time. With the help of ratio analysis, conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. However, this significance of financial ratio in evaluating companies performance varies among three major interest group where purpose differ widely. These interest group in the analysis of financial statement include;
Owner/investors:
They are concerned with the firm’s earning capacity, profitability and potential for growth and stability. Hence, they concentrate on the analysis of the firms present and future profitability.
Creditors:
The include bankers financial institutions interested in knowing the ability of enterprise to meet its financial obligations timely;
Financial executives:
Are concerned with evolving analytical tools that will measure and compare cost, efficiency, liquidity, and profitability with a view to making intelligent decisions.
1.6 Scope Of The Study
It is often an herculean task to conduct a comparative study of financial ratio analysis in all DN Meyer Plc in Nigeria to ascertain company’s overall performance due time and financial constraints. It is for this reasons of these constraints that the researchers streamlined the scope of this study to DN Meyer Plc., located in Benin City.
Furthermore, the research work is confined to examine how various financial ratios are used by the company to evaluate past and current performance, long term stability and financial strength of the firm. With respect to their financial statement of assets and liabilities
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