Analysis Of Financial Ratios As An Aid To Economic Analysis (A Case Study Of Union Bank Plc Enugu)

Project and Seminar Material for Accountancy / Accounting

Analysis Of Financial Ratios As An Aid To Economic Analysis (A Case Study Of Union Bank Plc Enugu)


Abstract


This study is on analysis of financial ratio as an aid to economic analysis. The total population for the study is 200 staff of Union bank PLC Nigeria, Enugu state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made accountants, human resource managers, customer care officers and marketers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


Chapter One


Introduction

1.1 Background of the Study

Management should be particularly interested in knowing the financial strengths of the firm to make their best use and to be able to spot out the financial weakness of the firm to take suitable corrective actions. Thus, Economic analysis is the starting point for making plans, before using any sophisticated forecasting and budgeting procedures. The strength and weakness of the firm need to be understood, so that the firm will be at equilibrium through the use of the strengths. To proper advantage and taking corrective actions against any weakness observed or reigned. Although, emphasis is focused on outsider users such as creditors and owners, management is aware that their performance will be received by these external parties and for other reasons. For example the basic financial statements are used to assess the effectiveness of management in planning and controlling operations as well as for decision-making. Management also recognizes that the evaluation of past operation as revealed by the analysis of the basic statements, represent a good starting point in future operations and serves as an important means of assessing past performance, and in forecasting and planning future performance. Published financial statements are properly oriented towards the long term earning power. Short-term creditors such as major suppliers or banks are usually more interested in the short-term ability of corporations to satisfy its obligations as they fall due. As regards to union Banks, they use mostly financial ratios to obtain clue as to future performance. This project has been embarked on mainly to give a general idea on how to make use of financial ratios aids in economic analysis. It also hopes to point out certain deficiencies associated with it and the view pints of different people working with union bank of Nigeria PLC Enugu.


1.2 Statement of Problem

The importance of financial ratios can never be over – emphasized. An efficient use of financial ratios goes a long way in carrying out this function. This fact not withstanding, I find out a lot of people in the banking sector are not even aware of financial ratios. Its functions and how it can aid the analysis and decision of the economy.

In an under – developed economy like ours, the need for this ratios is paramount if the economy is expected to be improved upon.

Another problem associate with the use of ratios is that ratios do not have much use if they are not analyzed over years. The ratios at a moment may suffer from temporary changes. This problem can be resolved by analyzing the trend of ratios over years. This is a major problem or set back in the economy. It is obvious that utilization of the financial rations is at stake and if nothing is done now. It could gradually be eroded.


1.3 Objective of the Study

The objectives of the study are;

  1. To ascertain financial ratio as an aid to economic analysis
  2. To ascertain the importance of financial ratio to business world
  3. To ascertain whether creditors form depends on financial ratios to know the liquidity margin of the firm
  4. To ascertain the relationship between financial ratio and economic analysis

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

  1. H0: financial ratio is not an aid to economic analysis
    H1: financial ratio is an aid to economic analysis
  2. H02: there is no relationship between financial ratio and economic analysis
    H2: there is relationship between financial ratio and economic analysis

1.6 Significance of the Study

This study is useful to bankers and other firms in decision-making. It also helps them take corrective measures where there is deficiency or weakness. Bankers use proper ratio analysis before they grant any short or long term loan.

Investors and creditors also benefit from this study since the subject matter of this study gives them the general picture of the firm. They are dealing with and also the capacity of the firm to met its obligations.

With the help of ratios we can determine:

  1. The ability of the firm to meet its current obligations
  2. The extent to which the firm has used its long term solvency by borrowing funds.
  3. The efficiency with which the firm utilizes its various assets in generating sales revenue and
  4. The overall operating efficiency and performance of the firm.

1.6 Scope and Limitation of the Study

The scope of the study covers analysis of financial ratio as an aid to economic analysis. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.


1.7 Definition of Terms

Financial Ratio:

Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets. Debt ratios measure the firm’s ability to repay long-term debt.

Economic Analysis:

A systematic approach to determining the optimum use of scarce resources, involving comparison of two or more alternatives in achieving a specific objective under the given assumptions and constraints.Economic analysis takes into account the opportunity costs of resources


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  1. Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  2. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  3. Chapter three deals on the research design and methodology adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was on analysis of financial ratio as an aid to economic analysis. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of financial ratio as an aid to economic analysis


5.2 Summary

This study was on analysis of financial ratio as an aid to economic analysis. Four objectives were raised which included: To ascertain financial ratio as an aid to economic analysis, to ascertain the importance of financial ratio to business world, to ascertain whether creditors form depends on financial ratios to know the liquidity margin of the firm, to ascertain the relationship between financial ratio and economic analysis.In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of Union bank PLC Nigeria, Enugu state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made accountants,human resource managers, customer care officers and marketers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


5.3 Conclusion

The research study revealed that financial analysis performs a crucial role on economic analysis, investment decisions making and organization performances, which has been shown to be major force in investment decision making. This is achieved by implementing the best fundamental concepts of financial statement analysis for any Bank. Union Bank PLC used as case study made the researcher to understand that, for any Bank to be successful, it should endeavor to make use of financial statement analysis because accounting itself is a language of business, and before venturing into any business, one must know the right method to achieve the stated goals and objectives. Also, studies have shown that successful utilization of accounting information requires a fit between three factors. First, a fit must be achieved with dominant view in the organization or perception of the situation. Second, the financial statement analysis must fit when problems are normally solved, i.e. the technology of the organization. Thirdly, the accounting information must fit with the culture of the organization i.e. the norms and value system that characterizes the organization. Finally, there is also a high level of awareness pertaining the role of accounting information and managerial efficiency. There is also a high level of awareness pertaining the role of accounting information system which is not limited to senior and management staffs alone but also cut across intermediate and junior staffs whose operations are also governed by the accounting information system. It is evident that the accounting information factor looms large among factors, which contribute to the overall corporate efficiency.


5.4 Recommendation

Having gone through this study the researcher recommends the following specific recommendations as a way of incurring that, financial statement plays a vital role in investment decisions making.

  1. Every financial institution should ensure that all material facts as regard the assets and equity of the organization should be reflected in their yearly financial statement. As such, the financial institutions should adhere to the demand of subjecting their financial statement to statutory audit as a way of authenticating their contents.
  2. The financial statement should be prepared using such a language and terms a layman can understand because the technical terms do not mean much to the investors. These should be prompt provision of the financial statement at the end of each financial year and the profit after tax should be reported precisely and correctly with actual figures and avoid use of percentage to enable any layman make good investment decision.
  3. Investment decision should not be on a vacuum or rule of thumb rather, the financial statement should be used as the bedrock and the volume of liabilities acquired by financial institutions should be minimal and invested wisely to avoid its negative effect on the profit of the bank which will discourage prospective investors. No investment decisions on a financial institution should be taken without the consideration of a company’s financial statement.
  4. Banks and companies should carry out educational enlightenment programme from time to time to enable investors understand the financial report fully. Investors should attach much importance to the annual reports so that banks and companies can really know the extent of their responsibility in preparing the financial statement.
  5. Banks and companies should sponsor research into the information needs of their investors and how best to communicate this information to them. There should be a review of annual report of banks and companies by the authority concerned, in order to affect the much-needed charges raised by investors considering the changing economic trend in the country

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