The impact of ratio analysis on business organization
Department: Banking and Finance
No of Pages: 52
Project Code: BFN7
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
Abstract
The
study set out to examine the impact ratio analysis on business organization
performance (a) to find out the impact of profitability ratios on business
organization performance, (b) to access the effect of liquidity ratios on
business organization performance(c) to examine the relationship solvency Ratio
has with business organization performance.
From
these objectives, three research questions were formulated and hypotheses state
in both null and alternative forms was equally formulated. The study adopted
the survey research design with a sample of 50 staff of Njieforbi company ltd
Buea, through a Purposive and convenient sampling procedure.
The
study used questionnaire for data collection. Result of the study revealed that
return on asset and equity are always difficult to calculate, that identifying
items from the balance sheet for calculation ratio is always a problem.
The
results show that the p-values obtain for Ratio Analysis (0.002), Profitability
ratio (0.001) Liquidity ratio (0.009) and Solvency ratio (0.012) for the
regression coefficients are also lower than the alpha level of significant of
5% specified in SPSS for the analysis except for Liquidity ratio time and
Solvency ratio,
therefore,
it can be interfered from the results of the ANOVA statistics is similar to
that of the regression coefficients.
Base
on the findings of the study, the following conclusions was drawn that
profitability ratios can easily be manipulated, net profit margin is not an
evergreen ratio to that can be used to compare profitability among industries.
It
was therefore, recommended that taxation department and other stake holder
should organize business seminars and workshops to train business on how to
calculate the ratio analysis so as to put them on used.
CHAPTER ONE
GENERAL INTRODUCTION
1.1 Background of the Study
The
history of ratio analysis can be dated back right in the 300BC however; the use
of ratios is of recent development. The earliest traces of financial statement
analysis are found in the last half of the nineteenth century when America was
approaching industrialist maturity.
At
that time, corporate management were being transferred over from enterprising
capabilities to the professional manager and the financial sector was becoming
a more predominant force in the economy(ANJUM,2011).
In
1919, Alexander Wall conducted a study in which he compiled a large statement
of financial statement. This study became the catalyst for ratio analysis
development and was conducted in response to the apparent need for more types
of ratios and for relative ratio criteria.
Firms
were stratified by industry and by geographical location in the study. Although
his results would be vulnerable to criticism by today’s standards, his study is
significant because it was widely‐read and marked departure from the customary
usage of a single ratio with an absolute criterion.
Wall
popularized the idea of using many ratios and using empirically determined
relative ratio criteria. During the 1920’s, interest in ratios increased
markedly. As a result, many articles were published on the subject of ratio
analysis.
Analysts
of this time period were attempting to bring some level of sophistication to
ratio analysis. James H.Bliss (1923) developed the first coherent system of
ratios which were tied together in a logical, deductive fashion.
He
considered ratios to be indicators of the status of relationship with business.
From this premise, he developed a model of the firm which consisted entirely of
ratios. Although his model was naïve, it represented a promising beginning for
the development of a theory of ratio analysis.
In
recent years, several articles have been written illustrating the importance
and need for ratio analysis in the public sector. Several of the articles have
appeared in practitioner oriented journals which speaks to the importance of
this area as a tool for the practicing business officer.
James
Howard (1987) wrote an article focusing on cost management as a key to survival.
He specifically points to financial ratios as a valuable tool to assist private
sector financial managers in this area.
Although
balance sheet ratios are only indirectly related to costs, they can be as
important as the actual standard cost data used for the income statement.
Certain ratios measured over a period of time and compared with other companies
can reveal how efficiently money is being utilized.
Howard
suggests that comparison should be made with industry standards for companies
of similar size. Beaver (1966:71) traces the history of ratio analysis to the
early 1900s when the analysis was confined to the current ratio for the
evaluation of creditworthiness only.
He
notes further that the development of ratio analysis during the 1960s evolved into
the use of several ratios by different users for different purposes – this
included credit lenders, credit rating agencies, investors, and management.
He
notes that despite the wide use of ratio analyses, little had been done to test
their practical and formal usefulness. Since then, attempts to improve on ratio
analysis and interpretation gained momentum with studies on business failure.
Analysis
of business is a rather broad term including analysis of financial, tangible
and intangible indicators of the scope and success of business activities, thus
connecting all operations in a company and encompassing all available
resources.
(Maja&
Pasic, 2014) Unlike it, financial analysis or analysis of balance, as it is
frequently called, is only part of a complex analysis, but the part where
analysis most frequently starts with and is considered very important since it
presents business results in the form of numerical (and therefore easily
understandable) indicators in that way simplifying the process of communication
in an organization.
Being
one of the simplest techniques, ratio analysis is most frequently the first
step in the analysis of financial condition and earning capacity of a company
providing the basic information on the state of liquidity, solvency, the
structure of assets and their resources, management efficiency and the degree
of success.
Ratio
analysis is based on the study of different relations between logically
connected balance sheet items including other relevant information. Basic
purpose of ratio numbers is to enable evaluation of financial condition of a
company, as well as, the trend of changes in the financial condition of a
company. (Knezevic et al., 2001, p. 25).
The
success of an enterprise is measured based on its performance. The company's
performance can be assessed through financial statements presented on a regular
basis every period (Juliana and Sulardi, 2003).
Brigham
and Enhardt (2003) stated that the accounting information on the activities of
the company's operations and financial position of the company can be obtained
from the financial reports.
Accounting
information in financial statements is very important for the business person
such as investors in decision-making. Investors will invest in companies that
can provide a high return.
1.2 Statement of Problem
Majority
of individuals and groups, such as company managers, investors, creditors and
shareholders, find difficulties in calculating and interpreting ratios analysis
to get an overview of their company’s financial position and performance.
Managers
use financial ratios mostly in decision making, since they can, for instance,
identify some weak areas that need to be solved, while investors use ratios
mostly to ensure the safety of their investments and their probable value
growth.
Creditors
use ratios to evaluate the risk of lending money to the company in question and
shareholders, who rely on ratios very much, estimate the value of their shares
by analyzing these ratios.
The
government, learning institutions and business on their part may have failed in
organizing workshops and seminars in training business men and their students
on manipulating the balance sheet to calculate ratio analysis so as to know the
health of their business.
Meythi
(2005) States that one of the ways to predict the company's profit was using
financial ratios. Financial ratio analysis can help the business person and the
Government in evaluating the financial state of the company's past, present and
projected the results or profits that will come.
Making
right decisions is the key in performance and value maximization. However,
proper business analysis, which can be achieved through financial ratio
analysis, is needed to make those right decisions.
The
ratio analysis is an essential tool in decision-making and in understanding the
performances of a company. Even though financial ratio analysis is very useful
and provides valuable information about company performances and operations, it
still faces certain limitations that require attention.
The
users of this analysis must be aware of these limitations to get more accurate
results. Financial analysts use financial ratios to determine financial health
of a company its financial condition and its profitability (Malinic et al,
2012).
These
ratios are calculated to obtain comparisons that can be more useful than the
‘raw’ numbers themselves. however, when selecting positions in ratio and
interpreting obtained ratio numbers one has to be careful and interpret each
ratio in the light of industry standards since neglecting the nature of
activity can lead to the wrong interpretation of ratio
Little
or no work has been done on the impact of ratio analysis on business
organization in Cameroon, and this has cause this researcher to carried out a
study on the impact of ratio analysis on business organization in
Cameroon.
1.3 Research Questions
1.3.1 Main research
question
- Does ratio analysis have significant impact on business organization?
1.3.2 Specific research
questions
- What is the impact of profitability ratios on business organization performance?
- What is the effect of liquidity ratios on business organization performance?
- Does solvency Ratio has any relationship with business organization performance?
1.4 Research Objectives
1.4.1 Main Research
Objective
- To examine the impact ratio analysis on business organization performance.
1.4.2 Specific Research
Objectives
- To find out the impact of profitability ratios on business organization performance.
- To access the effect of liquidity ratios on business organization performance
- To examine the relationship solvency Ratio has with business organization performance.
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