Banking and Finance | STUDY OF THE USE OF FINANCIAL RATIOS FOR THE ASSESSMENT OF THE PERFORMANCE AND T...

STUDY OF THE USE OF FINANCIAL RATIOS FOR THE ASSESSMENT OF THE PERFORMANCE AND THE PROFITABILITY OF A FIRM

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ABSTRACT

This research work “The study of the use of financial ratios for the assessment of the performance and profitability of a firm” touched all vital aspects of ratio analysis. In addition, it identified the various kinds of ratios, their uses, those that benefits from such analysis, as well as the limitations associated with the concept of financial ratio analysis.
However, this research work showed the relevance of the financial ratio analysis mostly to the publics of an organization, that is, the equity holder, short-term creditors, long-term creditors, the management, the customers/client and the tax authority. Also, a lending banker can also be able to assess the viability of a borrowing firm with the help of ratio analysis in order to decide on whether to or not to extend credits.
To examine this research work, the researcher embarked on secondary source of data as recommended. This entails the review of related literature by renowned and prominent authors of textbooks, journals, magazines and newspapers, as well as other publications.
This research work is essential for both students and those in the agricultural sector. It constitutes a good reading for practioners in the field of agriculture.

CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY

The significance of Financial Rations and its analysis can not be over emphasized. According to Iloh (2001), a good financial planning for any functional organization has to be related to the existing strength and weakness of such organization. In the effort to discover the aforementioned factors, it becomes necessary to evaluate the performance of such organization over a given period. Financial Ration analysis is therefore one of the methods used in determining the level of performance of an organization. It can be explained as the techniques of reducing aggregate financial data into meaningful quotients, which are compared to other existing financial data.
However, the researcher has developed interest in this particular topic in order find out the impact of financial ratio analysis, mostly to a lending banker. This is because, the issue of credit extension is not an easy task and is of technical in nature, one of the criteria for a successful lending is the review of the Financial Statements of a borrowing firm. This is actually carried out with help of ratio analysis.
Furthermore, the analysis of such financial statements will enable a lending banker to access the viability of such borrowing firm, in the area of liquidity, profitability as well as the nature of its funding.
Conclusively, having indept knowledge of the above concepts mentioned above through Financial Ration analysis, the lending banker will now be able to take appropriate decision on either to accept or reject a given loan proposal or request.

1.2 STATEMENT OF THE PROBLEM
The occurance of loan default is becoming so alarming in most NigerianBanks. This has affected most banks, specifically their capital adequacy, which invariably led to distress and failure. According to Orjih (1996), manipulation of accounting records by borrowers as well as inappropriate review and analysis of the financial statements of the borrower are among the causes of loan default and bad debt. That is, it creates room for the borrowers of fund to deviate from the terms of payment or repayment of fund borrowed from the lending banker.
For several years, most banks have experienced distress and failure as a result of bad lending through inappropriate analysis of financial statements. Therefore, the researcher intends to find out the necessary measures that could be adopted in order to remedy this urgly situation.

1.3 PURPOSE/OBJECTIVE OF THE STUDY
The study of this research work (the use of Financial Rations for the assessments of the performance and profitability of a borrower by a lending banker) intends to achieve the follow objectives:
• To identify the various classes of financial ratios as well as their importance.
• To findout how these Financial Rations are used to assess the performance and profitability of an organization.
• To find out the impact of Financial Ration analysis on a lending banker.
• To identify the effects and incidence of poor or inappropriate review and analysis of the financial statements of a borrower.
• To find out who benefits from ratio analysis.

1.4 SIGNIFICANCE OF THE STUDY
This subsection is associated with the usefulness of the study as well as who will benefit from this research work. Hence, this research work is of great significant as it deals with a study of the use of Financial Rations in assessing the performance and profitability of a firm. That is, it helps to know how viable a company or firm is. This research work will be beneficial to the following publics:
• The equity holder, it will enable them to assess the ability of firm to pay dividend and avoid bankruptcy.
• Short term creditors, it will enable them to assess the ability of firm to honour currently maturing financial obligations.
• Long term creditors, it will enable them to evaluate Annual interest rate operational efficiency and earnings power of a firm over a period.
• The management, it will create room for internal control and efficient asset management.
• The customer/client, it will enable them to know the availability of product/service.
• Tax Authority, it also creates room for tax collection.

Finally, the lending bankers will see this research work as a guide to its lending operations. The review of this work will help to increase their knowledge on ratio analysis, which will help them to evaluate the strength and weakness of a borrowing firm in order to decide accepting or rejecting any given loan proposal.

1.5 LIMITATION OF THE STUDY
According to Orjih (1999), limitations of the study are those constraints facing a researcher such as time, events, people, etc. therefore, the researcher will not forget to state the problems that confronted her in the course of carrying out this research work. The constraints include: finance, time, peoples attitudes towards the release of related materials for the study and many other factors.

1.6 DEFINITON OF TERMS
RATIO – A ratio is the indicated quotient of two mathematical expressions.
FINANCIAL RATIO ANALYSIS: This is one of the methods used in determining the level of performance of an organisation.
PROFITABILITY: This implies the extent or level of profits, which a firm realized over a period of time.
BANK LENDING: This is the extension of credits or funds to deficit hands who need fund for business expansion and other purposes.
LIQUIDITY: Liquidity entails the ability of a firm to meet its obligations as they become due.
BANK DISTRESS: A bank is declared distress when it is unable to meet the bank examination rating system known as CAMEL, or when it is not able to meet balance sheet test of having enough assets at market value to cover its liabilities.

REFERENCES
Iloh J. (2001) Fundamentals of financial Management. Enugu: Galnic ventures P. 99.
Orjih J. (1996) Banking Operations in Nigeria.
Enugu: Je-Rohi Publishers P. 119.
Ozo .J., Odo .P., Ani .J. and Ugwu .T. (1999), Introduction to Project 
Writing for Business and Financial Studies.
Enugu: Sunny Enterprises P. 221.
Orjih .J. (1999) Business Research Methodology
Enugu: Meteson Publicity Company.
P. 40.
Obasikene A.C. (2000) Understanding Bank CreditAnalysis.
Enugu: Hugotez Publications.
P. 63.
Udeh S.O. (2000) Business Finance: Enugu:
Malik Enterprises Nig. P. 147.
Orjih J. (1998) Seminar in Banking and Finance:
Enugu: Bob Billion Publishers. P. 47.
Mgodille C.C. (2001) Bank Lending and Loan Administration.
Enugu: Hosanna Publications.
PP. 51 – 53.
Orjih J. (2001) Financial Management. Enugu:
Splashmedia Organisation.
P. 68.
Anyanwaokoro M. (2001) Elements, Practice and Process of Banking Operations. Enugu:
Hosanna Publications P. 47.

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