The Role of Financial Ratios on Business Decision

The Role of Financial Ratios on Business Decisions.

ABSTRACT

This study seeks to determine the role of financial ratios on business decisions of money deposit banks listed on the Nigeria Stock Exchange (NSE) from 2005-2013.

There were three ratios used which were selected based on CAMEL ratio. Capital adequacy ratio was the dependent variable. The explanatory variables are liquidity ratio and profitability ratio.

Liquidity ratio includes; cash & cash equivalent/ Total Liabilities, Loan and Advances/Total Assets, Loan and Advances/ Total Deposits while profitability ratio includes;

Return on Assets, Return on Equity and Net interest income / Loan and Advances. Descriptive methodology, correlation and regression analysis were applied to data obtained from the financial statement of the banks using the Statistical Package for Social Student (SPSS).

The result showed a weak and negative relationship among when ratios are considered in isolation but a strong relationship was exhibited when all the ratios were analysed in aggregate.

The studies thus conclude that financial ratios can be useful for business decision making when other intervening factors are incorporated.

TABLE OF CONTENTS 

Title page……… i
Certification…… ii
Dedication…. iii
Acknowledgement…… iv
Table of contents…… v
List of tables……..viii
Abstract…… ix

CHAPTER ONE: INTRODUCTION Background information

1.1.1 Historical development of banking system in Nigeria ……….. 4
1.2 Statement of the problems…… 7
1.3 Objectives of the study………….. 7
1.4 Research questions….. 8
1.5 Research hypotheses………. 8
1.6 Significance of the study….. 9
1.7 Scope and limitations……… 10
1.8 Organisation of the study… 10
1.9 Definition of terms……………… 11

CHAPTER TWO: LITERATURE REVIEW

2.0 Introduction…… 14
2.1 Empirical framework…….. 14
2.2 Conceptual framework…. . 24
2.2.1 Interpretation of financial statements….. 24
2.2.2 Tools of analysis and interpretation of financial statements… .. 24
2.2.3 Ratio analysis.. .. 24
2.2.4 Importance of ratio analysis……. .. 25
2.2.4.1 Determinant of strengths and weakness… 25
2.2.4.2 Level of efficiency….. 25
2.2.4.3 Forecasting……. 25
2.2.4.4 Analyzing financial statements…… . 25
2.2.4.5 Business performance ……….. 25
2.2.5 Functional classification of ratio analysis..26
2.2.5.1 Profitability ratios…… 26
2.2.5.2 Liquidity ratios……. 27
2.2.5.3 Leverage ratios…… 28
2.2.5.4 Efficiency ratios………. 29
2.2.5.5 Growth ratio……. 31
2.2.6 Comparative analysis of financial statements .. 32
2.2.7 Limitations of financial ratio………. 34
2.2.8 Business decisions in relation to financial ratios…. 35
2.2.9 Types of business decisions……………. 36
2.2.9.1 Investing decision…. 36
2.2.9.2 Financing decision…. 37
2.2.9.3 Dividend policy…….. 37

CHAPTER THREE: METHODOLOGY

3.0 Introduction…………… 39
3.1 Research design…..39
3.2 Research population and sampling procedure….. 40
3.3 Research instrument…… 40
3.4 Validity and reliability of instrument……. 40
3.5 Data collection technique …………. 41
3.6 Data analysis technique……… 41
3.7 Measurement of variables………. 42
3.7.1 CAMEL variables……. 42

CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATIONS

4.0 Introduction……….. 46
4.1 Analysis for data collected and interpretation….. 46
4.1.1 Listed bank………. 46
4.1.2 Descriptive statistical table….. 47
4.1.3 Correlation table…… 47
4.1.4 Model summary table….. 48
4.1.5 ANOVA table…..49
4.2 Graphical interpretation of selected banks………… 50

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary of findings…. 55
5.2 Conclusion……….. 56
5.3 Recommendation …… 56
5.4 contributions to knowledge and suggestions for further studies . 56
Reference…….. 57
Appendix…….. 59

INTRODUCTION

Background of the Study

Accounting is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating of financial information in order to enhanced informed judgement and economic decision by users of the account.

This can be making possible when the financial information is made available to the users. American Accounting Association (AAA) defined accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the user of information”.

Financial information can be derived from the financial statement.

The standard practice for businesses is for them to present their financial statements which adhere to regulatory framework and conceptual framework established in order to ensure uniformity of information and presentation across international borders.

The financial statements comprise collection of reports about an organisation’s financial result and condition which is presented in a clear and concise manner as it contains useful financial information that is hidden in figures.

Its major components are; Statement of Financial Position, Statement of Cash Flow, Statement of in Equity, Statement of Profit or Loss and Other Comprehensive Income and Notes to the Accounts.

Financial ratios are applied on items reported in the financial statements with the intention to derive the effective economic decision for the following reasons:

REFERENCES

Abba,Ogere, .G., Peter, .Z. &Inyang, .E.E. (2013). Capital Adequacy Ratio and Banking Risk in the Nigeria Money Deposit Banks.Research Journal of Finance and Accounting vol. 4, No. 17.

Alferdo, .M.O., Ruano, .S. &Vicante, .S.F. (2013).Bank Equity Fricitions Ratio and Interest Ratios.International Journal of Central Bank

Alsamaree, .A.H. (2013).Financial Ratio and the Performance of Bank. Journal of Research in International Business and Management Vol3 (1) pp. 17-19.

AL-Shubiri, .F.N. (2012). Debt Ratio Analysis and Firm Investment. Internatinal Journal Of Economics and Finance Issues Vol2, no1.

American Management Association. (N.D). Financial Decision Making and the Techniques in Financial Analysis

Anupam, .D.,Bandyopadhyay, .G. & Chakraborty, .B.N. (2011). Application of the Factor Analysis on the Financial Ratio and Validation of the Result by the Cluster Analysis: An Empirical Study on the India Cement Industry. Journal of Business Studies Quarterly Vol. 2, No. 3, pp. 13-31.

Aran, .S.G. (2010).Financial Ratio and the Performance of bank.3 rd International Conference on Quantitative Method, used in Economics and Business.

Bitter, .L.R., Ronald, .S.B. & Lawrence, .R.L. (1984).An Introduction to Business in Action.2 nd edition. New York: MC Graw Hill Book Company.

Chordia, .T., Roll, .R. &Subrahmanyam, .A. (2002). Order Imbalance, Liquidity, and Market Returns. Journal of Financial Economics 65(2000) 111-130.