The impact of ratio analysis on business organization

Saturday, December 3, 2022

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

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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.




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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