FINANCIAL RATIO AS A TOOL FOR EVALUATING THE PERFORMANCE OF COMPANIES AND INVESTMENT DECISIONS

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FINANCIAL RATIO AS A TOOL FOR EVALUATING THE PERFORMANCE OF COMPANIES AND INVESTMENT DECISIONS, A STUDY OF DANGOTE CEMENT COMPANY

TABLE OF CONTENTS

Title Page –       –       –       –       –       –       –       –       –       –       i

Declaration      –       –       –       –       –       –       –       –       –       ii

Approval Page  –       –       –       –       –       –       –       –       –       iii

Dedication       –       –       –       –       –       –       –       –       –       iv

Acknowledgements  –       –       –       –       –       –       –       –       vi

Table of Contents     –       –       –       –       –       –       –       –       vii

List of Tables   –       –       –       –       –       –       –       –       –       x

Abstract   –       –       –       –       –       –       –       –       –       –       xi

CHAPTER ONE: INTRODUCTION

1.1   Background to the Study –       –       –       –       –       –       1

1.2   Statement of the Problem –       –       –       –       –       –       4

1.3   Objectives of the Study    –       –       –       –       –       –       5

1.4   Research Questions –       –       –       –       –       –       –       6

1.5   Research Hypotheses       –       –       –       –       –       –       6

1.6   Significance of the Study –       –       –       –       –       –       7

  • Scope of the Study –       –       –       –       –       –       –       7

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1   Introduction     –       –       –       –       –       –       –       –       8

2.2   Historical Background of Ratio        –       –       –       –       –       8

2.3   Conceptual Framework –         –       –       –       –       –       10

2.4   Empirical Review –   –       –       –       –       –       –       –       32

CHAPTER   THREE: RESEARCH METHODOLOGY

  • Introduction –       –       –       –       –       –       –       –       36
  • Research Design –       –       –       –       –       –       –       36

3.3   Population of the Study   –       –       –       –       –       –       37

3.4   Sample Size of the Study –       –       –       –       –       –       38

3.5   Definition of Variables employed in the Study –       –       38

3.6   Data Analysis Techniques –     –       –       –       –       –       40

3.7   Model Specification –       –       –       –       –       –       –       41

CHAPTER FOUR: DATA PRESENTATION ANALYSIS AND FINDING

  • Introduction –       –       –       –       –       –       –       –       43
  • Data Presentation and Data Analysis –       –       –       43

4.3   Test of Research Hypotheses   –       –       –       –       –       51

4.4   Discussion and Interpretation of Results –       –       –       53

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION

5.1   Introduction     –       –       –       –       –       –       –       –       55

5.2   Summary of Findings –   –       –       –       –       –       –       55

5.3   Conclusion      –       –       –       –       –       –       –       –       56

5.4   Recommendations   –       –       –       –       –       –       –       56

5.5   Limitations of the Study  –       –       –       –       –       –       57

Bibliography    –       –       –       –       –       –       –       –       59

Appendices      –       –       –       –       –       –       –       –       60

CHAPTERONE

INTRODUCTION

1.1   Background to the Study

Beyond crunching and depicting numbers in the financial statements, the primordial goal of financial management is creating wealth (Tugas, 2012). Wealth creation and general performance of any organisation are measured in terms of its financial strength and weakness using financial ratio (Shirkouhi, et al, 2012).  Wealth creation is best achieved by maximizing firm’s value through optimal usage of resources over a long period of time (Tugas, 2012). In other words, it is the continuous and sustainable accumulation of more assets (growth) as time passes by. Putting these into perspective, wealth creation is a factor of a series of sound business decisions, made one after the other, that originate from structured or scientific basis. As risks are the ones that prevent any firm from achieving its objectives, coming up with structured and scientific bases of decisions reduces the likelihood of the former (risks). In financial management, one of these structured and scientific bases on which firm decisions are anchored is the financial statement analysis (Tugas, 2012).

According to Drake (2010), financial statement analysis is the selection, evaluation, and interpretation of financial data, along with other pertinent information, to assist in investment and financial decision-making. Moreover, it is also the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account (accounting for management website).

One of the tools in financial statement analysis is financial ratio analysis. As financial statements are usually lengthy, it will be more efficient and strategic to just pick up the figures that matter and plug them in pre-defined formulas developed through time by finance and accounting scholars.

Financial ratios provide insight into the strengths and weaknesses of a business and give the managers indications of areas that need improvement (Heidari, 2012). A thorough knowledge of which ratios to be used and how to use them is a critical management skill. The primary focus of every business is to make a profit, have enough liquidity to pay its bills and maintain control of borrowed funds (Heidari, 2012). Several ratios give managers the tools to evaluate these areas and measure their performance.

Businesses should constantly monitor these ratios to detect negative trends and identify areas that need improvement. Thus financial ratio information assists its financial statement users in obtaining the relevant information concerning the detail and source of cash for operating, investing and financing activities of the company over a reported period.

Financial investment ratios have proved vital for purposes of financial analysis over several decades ago, with the effect that the traditional ratio analysis techniques have become quite well established in literature. Traditionally, financial analysis, for a long time, depended on accounting performance via profitability measures such as return on assets and net sales to income, among others. These forms of ratios, however, are affected by the fundamental drawbacks that are characteristics of ‘accrual based accounting’ (Albrecht, 2003).

While most business owners focus on providing exceptional products and services to their customers, they must also pay attention to the performance and health of their company (Heidari, 2012). This study is therefore concerned with the analysis of cash flows ratios as a measure of performance and investment decisions of manufacturing companies.

1.2   Statement of the Problem

Proper evaluation/measurement of a company performance for investors, shareholders and lenders is of paramount importance to management of all businesses in general. performance evaluation using financial ratios from the statement of cash flow (SCF) have gained attention from academicians and industry practitioners (DeFranco & Schmidgall, 1998; Schmidgall, Geller, & Ilvento, 1993) as cited in (Ryu & Jang, 2004). This is mainly due to the ability of financial ratios provide supplementary information in understanding the “real” operational status of a business.

Previous studies have provided substantial evidence supporting the application and usefulness of cash flow approaches in financial ratios analysis (DeFranco & Schmidgall, 1998; Mills &Yamamura, 1998; Zeller & Stanko, 1994). Despite the fact that financial ratios are becoming increasingly important yardstick for performance measurement and investment decisions, limited efforts have been made to investigate the usefulness of financial ratio in measuring financial performance firms in the manufacturing sector especially of emerging economies like Nigeria. Thus, this study is therefore a modest attempt aimed at filling the hitherto existing gap in the literatures.

1.3   Objectives of the Study

The main objective of this study is to investigate the relationship between financial ratios and the performance of manufacturing companies in Nigeria. Specifically, this study seeks to accomplish the following objectives:

  1. To investigate the extent of the relationship between inventory turnover ratios (ITR) and the net profit margin of Dangote Cement Company.

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