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RATIO ANALYSIS AND FINANCIAL PERFORMANCE OF MANUFACTURING COMPANY

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

1.2 Statement of the Problem

1.3 Objectives of the Study

1.4 Research Questions

1.5 Statement of Hypotheses

1.6 Significance of the Study

1.7 Justification of the Study

1.8 Scope of the Study

1.9 Definition of Terms

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

2.2 Conceptual Framework

2.3 Theoretical Framework

2.4 Literature Review

2.5 Empirical Review

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

3.2 Area of Study

3.3 Source of Data

3.4 Sampling Techniques

3.5 Model Specification

3.6 Limitations of the Study

CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION

4.1 Introduction

4.2 Data Presentation

4.3 Discussion of Findings

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

5.2 Conclusion

5.3 Recommendations

5.4 Suggestion for Further Studies

References

LIST OF TABLES

Table 4.1: Descriptive Statistics

Table 4.2: Correlations

Table 4.3: Model Summary

Table 4.4: Coefficients

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Every firm is mostly concerned with its profitability. Investors all over the world put their money into a business so as to get some returns on their investment in any form of business (sole proprietorship, partnership or corporations). In small and medium business, owners have direct or indirect control over the management of their business. In this extent they themselves are responsible for the profits and losses. On the other hand, in the case of large companies such as public limited Liability Company. The management of the affairs of such companies is usually done by the management team on behalf of owners in line with objectives of the shareholders especially as it relates to corporate profitability and payback period (Webb, 2010).

If a small business has outside investors who have invested their resources into the company, the primary concern of ensuring that such investments are protected, becomes the major problem of decision makers. This assurance can be achieved through corporate profitability and efficient performance. Profitability ratios have proved to be some of the most dependable tools to ensure a company’s overall efficiency and performance. Many researchers have studied the corporate profitability in many ways but none of them have studied the relationship between financial ratio analysis and corporate profitability (Podilchuk, 2013). As a result, the researchers chose to examine the relationship between financial ratio analysis and corporate profitability in quoted Guinness Nigeria Limited.

Okwuosa (2010) opines that ratio analysis is one number expressed in terms of another to show the relationship between two variables. He adds that in financial accounting and reporting, it is generally agreed that there are certain relationship between items shown in the profit and loss account and those in balance sheet as well as items in these statements, so ratios are used as means of expressing these relationship. Emekekwue (2013) sees financial ratio analysis as a financial ratio that will aid the investor in coming to a conclusion about the need to invest in a particular firm. These ratios will prima at facie aid the investor to have an insight into the running of the organization. Because of the importance attached to ratios, various ratios have been established as an indicator of corporate performance.

Brigham and Ehrhardt (2010) state that financial ratios are designed to help evaluate financial statements. Financial ratios are used as a planning and control tool. Financial ratios analysis is use to evaluate the performance of an organization: it aims at determine the strong and weak points and it offers solutions by providing appropriate plans based on the specific interest of the evaluator.

Osisioma (2005) defines financial ratio as analysis of the resolutions or separation of data into their elements or component parts, the tracing of facts to their source with a view to discovering the general principles underlying individual phenomena. He contends that the analysis of financial account is therefore the interpretation, amplification and translation of facts and data contained in the financial statements, the purpose being the drawing of relevant conclusions therefore making inferences as to business operations, financial positions and future prospects.

Pandey (2010) sees financial ratio analysis as a process of identifying the financial strength and weakness of the firm by properly establishing relationships in the firm through properly establishing relationships between the items of the balance sheet and the profit and loss account. He adds that ratio analysis is a powerful tool of financial analysis. A ratio is used as a bench mark for evaluating the financial position and performance of a firm so the relationship between two accounting figures expressed mathematically is known as financial ratio or (simply as a ratio).

1.2 Statement of the Problem

Many financial and accounting models were developed during past decades. However, financial ratios still kept its classical and fundamental power either as part of these financial and accounting models or as another important supportive analysis with it. Because of the proven power of the ratio analysis in the practical financial and planning analysis. Though however, financial ratios analysis has its limitations; which can be summarized as follows (Lermack, 2008): there is considerable subjectivity involved as there is no theory as to what should be the right number for the various ratios; ratios may not be accurately comparable across different companies due to a variety of factors such as different accounting practices and different financial year; ratios are based on financial statements that reflect the past only and are not an indication of the future; and financial statements provide an estimation of the costs and not values.

Financial ratio analysis is important to the management, owners, personnel, customers, suppliers, competitors, regulatory agencies, tax payers and lenders each having their views in applying financial statement analysis in their evaluations and making judgments about the financial health of organization. Many financial organizations also compare their own ratio values to those for similar organizations looking for differences that could indicate weaknesses or opportunities for improvement (Vincent, 2013).

Literatures have shown that most of the studies conducted on financial ratio analysis and corporate profitability dwelt largely on financial sectors. However, inadequate financial ratio analysis has remained a problem for firms in Nigeria due to its negative effect on their profitability (Oloboyede, 2012), Smith (2003) also noticed that a large number of business failures in the past have been blamed on the inability of the financial managers to plan and control the financial ratios of their respective firms.

Adegoke (2012) further observes that some firms in Nigeria with some promising investments with high rate of return have turned out to be failures and frustrated and out of business due to lack of inadequate use of financial ratio. Nigeria as a country is yet to determine a better relating tool for corporate profitability in industries. Because of this, many problems have been found or discovered to be hindrance to the entire business sectors. A look at the annual reports of Guinness Nigeria Limited shows large fluctuations in the profits. This variation of profit among Guinness Nigeria Limited suggests that some specific factors play crucial roles in influencing Guinness Nigeria Limited profitability. It is therefore essential to identify these factors and how they relate to corporate profitability in Nigeria. It is sad to note that in developing countries such as Nigeria, only few studies have been carried out on the issue of corporate profitability of Guinness Nigeria Limited, hence there is a need for more studies in the Guinness Nigeria Limited. These problems have necessitated this research work to determine the relationship between financial ratio analysis and corporate profitability in order to assist in identification of the factors of corporate profitability to avoid losses and also to help solve these problems faced by Nigerians and other countries of the world in choosing the best relating tools to use for corporate profitability.

1.3 Objectives of the Study

The main objective of this study is to examine the Ratio analysis and financial performance of manufacturing company in Guinness Nigeria Limited. The specific objectives of this study are:

To examine the relationship between total assets turnover ratio and return on assets of Guinness Nigeria Limited.
To determine whether debtor turnover ratio has any significant relationship with return on assets of Guinness Nigeria Limited.

To identify the relationship of debt equity ratio on return on assets of Guinness Nigeria Limited.

To know the extent of relationship of the interest coverage has on return on assets of Guinness Nigeria Limited.
To establish if there is any significant relationship between creditors’ turnover ratio and return on assets of Guinness Nigeria Limited.

1.4 Research Questions

i. What is the relationship between total assets turnover ratio and return on assets (ROA) of Guinness Nigeria Limited?

ii. How can we determine whether debtor turnover ratio has any significant relationship with return on assets of Guinness Nigeria Limited?

iii. What is the relationship of debt equity ratio on return on assets of Guinness Nigeria Limited?

iv. What relationship does interest coverage has on return on assets of Guinness Nigeria Limited?

v. Are there significant relationship between creditors’ turnover ratio and return on assets of Guinness Nigeria Limited?

1.5 Statement of Hypotheses

Based on the research questions, the following hypotheses were formulated:

Ho₁: Total assets turnover ratio has no significant relationship on Return of assets of Guinness Nigeria Limited.

Ho₂: Debtor’s turnover ratio has no significant relationship on Return on assets of Guinness Nigeria Limited

Ho₃: Debt equity ratio has no significant relationship on Return on assets of Guinness Nigeria Limited.

Ho₄: Interest coverage has no significant relationship on Return on assets of Guinness Nigeria Limited.

Ho₅: There is no significant relationship between creditor turnover ratio and Return on assets of Guinness Nigeria Limited.

1.6 Significance of the Study

The significance impact of ratio analysis in financial institution cannot be over emphasized. It is therefore expected that, this research work is bound to be beneficial to the following:

Management: Most management decision is based on information from ration analysis. Management planning is also supported by vital information from ratio analysis.
Shareholders: For shareholders to determine their wealth maximization, they rely on information from ratio analysis such as stability ratio and leverage ratio.
Potential Investor: for potential infestation is and for them to know or ascertain the organization is based on vital information from ratio analysis.
Employees: The interest of employee is the organization is how their welfare can be improved. They are able to obtain information for the agitation for improvement on their welfare through ratio analysis such as profitability ratio.
Government: Government also relies on information from ratio analysis in the assessment of the organization for tax purpose such as profitability and liquidity ratios.

1.7 Justification of the Study

The outcome of this study will serves as a guide for ratio analysts on how to overcome the effect of ration analysis in an organization. The research will also serve as a source base to other scholars and researchers interested in carrying out further research in this field in future. The study therefore will extend the frontiers of the existing literature by emphasizing the critical analysis of the Ratio analysis and financial performance of manufacturing company in which Guinness Nigeria Limited was used as case study.

1.8 Scope of the Study

The scope of this study is limited to the Ratio analysis and financial performance of manufacturing company in terms of content, while the geographical scope of this study is limited to Guinness Nigeria Limited.

1.9 Definition of Terms

The trilogies used in this study are defined below for the better understanding of this work so that research will not be misinterpreted.

Bank: it is a financial institution which primarily holds out itself to accept deposited from consumers and payout on demands.

Ratio Analysis: Ratio analysis refers to the determination of the significant relationship which exists between firs as show in a firm’s performance.

Profitability: This measure indicates whether the company is performing satisfactorily. They are used among other things, to measure the performance of management to identify whether a company may be a worthwhile investment opportunity and to determine a company’s performance relative of its competitor.

Management: Management can be described as the art of working particularly through people for the achievement of the board goals of an organization.

Liquidity: Liquidity measures the ability of a business to meet short term obligation on.

Activity: Activity helps assess the efficiency of manager’s actions.

Return on Capital Employed: this is the yardstick employed to measure the efficiency of the management in utilizing the assents of the business.

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