A Critical Analysis Of The Use Of Accounting Ratios To Measure Financial Performance Of An Organization (A Case Study Of Unilever Financial Statement)

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A Critical Analysis Of The Use Of Accounting Ratios To Measure Financial Performance Of An Organization (A Case Study Of Unilever Financial Statement)


Abstract


The study critically analyzed the use of accounting ratio to measure the financial performance of an organization. This study was undertaken majorly to analyze the impact of accounting ratio on the financial performance of an organisation. Specific objectives of the study are: To measure the liquidity position of Unilever Company Limited, to find out the profitability trend of the organization given its level of investment and turnover, to find out the level of gearing and investment ratios of the organization and to assess the performance measurement policy within Unilever Company Limited.

Concerning methodology for this study, the major instrument used for this study is the secondary data. The company’s financial data and performance were captured and used in the analysis.

The surveys research method was used for this study. The survey technique will also allow the researcher to examine several variables and use multi-variant statistics to analyze data. In analyzing the data collected for the purpose of carrying out this research, the statistical tool known as the Pearson Product Moment Correlation (PPC) and the statistics were used. The use of sample percentage was also employed. Tables were used in presenting the data for the purpose of the simplicity and clarity.

The overall aim of this project is to assess the financial performance of manufacturing organizations for the period, 2009, 2010 and 2011 using Unilever Company Limited as a case study.


Table of Contents


Preliminary Page(s)

  • Title Page
  • Declaration
  • Approval
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of Content

Chapter One

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of General Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Definition of Terms

Chapter Two

Review of Related Literature

  • 2.1 Introduction
  • 2.2 Performance Management
  • 2.3. Management efficiency – (Qualitative Factor)
  • 2.4. Existing Performance Measurement Framework
  • 2.5. Measuring or Assessing Financial Performance
  • 2.6. Prior Studies of Overall Organizational Performance
  • 2.7. Traditional vs. Non-traditional performance measures
  • 2.8. Measuring and Rewarding Performance
  • 2.9 Use and Users of Ratio Analysis
  • 2.10. Advantages of Ratio Analysis
  • 2.11. Limitations of Ratio Analysis
  • 2.12. Trend Analysis

Chapter Three

Research Methodology

  • 3.1 Introduction
  • 3.2 Research Design
  • 3.3 Area of the Study
  • 3.4 Population of Study
  • 3.5 Sample size and Sampling Techniques
  • 3.6 Instrument for Data Collection
  • 3.7 Validity of the Instrument
  • 3.8 Reliability of the Instrument
  • 3.9 Method of Data Collection
  • 3.10 Method of Data Analysis

Chapter Four

Data Presentation and Analysis

  • 4.0 Introduction
  • 4.1 Data Presentation and Analysis
  • 4.2 Characteristics of the Respondents
  • 4.3 Data Analysis
  • 4.4 Testing Hypothesis
  • 4.5 Summary of Findings
  • 4.6 Discussion of Findings

Chapter Five

Summary, Conclusion and Recommendation

  • 5.0 Introduction
  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendations
  • References
  • Appendix

Chapter One


Introduction

1.1 Background of the Study

Over the years, one major aim of most organizations in Ghana is to improve on their financial performances through effective and efficient accounting and finance practices. Financial performance of every organization in recent times have gained top priority, as most users of accounting and financial statement have developed indents in the financial position of the organization in question. Stakeholders of every organization need to know the financial performance of their organization, hence the need for managers to improve the financial position of the organization they manage. Assessing the financial position of an organization is the first step for organizations who want to improve their financial performances. After assessment, control measures are now established to correct deviations, and improve financial performance. The overview of the manufacturing industry in Ghana is explored including the various types of manufacturing organizations of which Unilever Company Limited is part. However, this research was undertaken to help assess the financial performance of manufacturing organizations for the periods, 2009, 2010 and 2011 using Unilever Company Limited as a case study.

History of the Ghanaian Manufacturing Industry

In 1957, after Ghana gained independence, the Nkrumah government launched an industrialization drive that increased manufacturing’s share of GDP from 10 percent in 1960 to 14 percent in 1970. This expansion resulted in the creation of a relatively wide range of industrial enterprises, the largest including the Volta Aluminum Company (Valco) smelter, saw mills and timber processing plants, cocoa processing plants, breweries, cement manufacturing, oil refining, textile manufacturing operations, and vehicle assembly plants. Many of these enterprises, however, survived only through protection. The overvalued cedi, shortages of hard-currency for raw materials and spare parts, and poor management in the state sector led to stagnation from 1970 to 1977 and then to a decline from 1977 to 1982.

Thereafter, the manufacturing sector never fully recovered, and performance remained weak into the 1990s. Underutilization of industrial capacity, which had been endemic since the 1960s, increased alarmingly in the 1970s, with average capacity utilization in large- and medium-scale factories falling to 21 percent in 1982. (CIA World Factbook, 2009)

Ghana’s record with industrialization projects since independence is exemplified by its experience with aluminum, the country’s most conspicuous effort to promote capital-intensive industry. This venture began in the mid-1960s with the construction of a 1,186-megawatt hydroelectric dam on the lower Volta River at Akosombo. Built with assistance from Britain, the United States, and the World Bank, the Akosombo Dam was the centerpiece of the Volta River Project (VRP), which the Nkrumah government envisioned as the key to developing an integrated aluminum industry based on the exploitation of Ghana’s sizable bauxite reserves and its hydroelectric potential. Foreign capital for the construction of an aluminum smelter in Tema was obtained from US-based Kaiser Aluminum, which acquired a 90 percent share in Valco, and from US-based Reynolds Aluminum, which held a 10 percent share. Valco became the principal consumer of VRP hydroelectricity, using 60 percent of VRP-generated power and producing up to 200,000 tons of aluminum annually during the 1970s. (CIA World Factbook, 2009)

Severe drought compounded the effects of unfavorable market conditions by reducing the electricity generating capacity of the Akosombo Dam and by forcing a temporary shutdown of the smelter from 1983 to 1985. Aluminum production was slow to recover in the wake of the shutdown. In the early 1990s, aluminum production and exports continued to be negligible.

Drastic currency devaluation after 1983 made it exceptionally expensive to purchase inputs and difficult to obtain bank credit, which hurt businessmen in the manufacturing sector. Furthermore, the ERP’s tight monetary policies created liquidity crises for manufacturers, while liberalization of trade meant that some enterprises could not compete with cheaper imports. These policies hurt industries beset by long recession, hyperinflation, outmoded equipment, weak demand, and requirements that they pay 100 percent advances for their own inputs. Local press reports have estimated the closure of at least 120 factories since 1988, mainly because of competitive imports. The garment, leather, electrical, electronics, and pharmaceuticals sectors have been particularly hard hit. In 1990, even the New Match Company, the only safety match company in the country, closed. (CIA World Factbook, 2009)
In 1986 the government established the Ghana Investment Center to assist in creating new enterprises. Between 1986 and 1990, the vast majority of projects approved—444 of 621—were in the manufacturing sector. Projected investment for the approved ventures was estimated at US$138 million in 1989 and at US$136 million in 1990. In the initial phase, timber was the leading sector, giving way in 1990 to chemicals. In 1991 the government established an office to deal with industrial distress in response to complaints that “unrestrained imports” of foreign products were undermining local enterprises. The 1992 budget included assistance for local industrialists; ¢2 billion was set aside as financial support for “deserving enterprises.”

The dominant trends in manufacturing, nonetheless, were the involvement of foreign capital and the initiation of joint ventures. Significant new enterprises included a US$8 million Taiwanese-owned factory, capable of turning out ten tons of iron and steel products per hour, which began trials at Tema in 1989. Although approximately 500 projects had been approved since the investment code came into force in 1985, almost half had still not been launched by the end of 1989. Between 90 and 95 percent of the approved projects were joint ventures between foreign and local partners, 80 percent of which were in the wood industry. (CIA World Factbook,

Company Profile

Unilever Ghana Limited was established in Ghana between 1928-1931 as the United African Company (UAC) out of two companies, the lever Brothers’ company and the African and Eastern Trade Corporation. The Lever factory was built in 1963. The UAC was absorbed into its parent Company Unilever from the United Kingdom to form Unilever Ghana Limited in 1992. It had already been operating as a trading company but later shifted to manufacturing. Currently, the company’s business in Ghana comprises the manufacturing and distribution of food products like cooking oil, spices and iodised salts, home care products like soaps and detergents and personal care products like body, hair and oral care products. The company has eleven departments which includes; The customer Development department, Human Resource department, Brand Building department , Legal department, Supply Chain department, Production department, Finance department, sales routine department ,Transport department, Quality department and Information Technology department. The company has its headquarters at Tema and has 900 employees across the country.

Unilever Ghana Limited is a public company domiciled in Ghana. The company’s country of incorporation is Ghana. The address of the company’s registered office is Tema Factory, P. O. Box 721, Tema, Ghana. The consolidated financial statements of the company as at the year ended 31 December 2009 comprise the company and its subsidiaries (together referred to as the “Group”). The Group primarily is involved in the manufacture of consumer products, the growing of oil palm and the processing of palm fruits to produce palm oil and palm kernel. The company is listed on the Ghana Stock Exchange. The ultimate parent company is Unilever PLC, a company incorporated in England. Other related parties,

Unilever Overseas Holdings Limited, UAC International Limited and CWA Holdings Limited, Companies wholly owned by Unilever PLC has significant shareholdings in Unilever Ghana Limited. In view of the fact that Unilever Ghana Limited has the power to exercise control over the operating and financial policies of Twifo Oil Palm Plantations (TOPP) Limited, and in accordance with International Financial Reporting Standards, TOPP has been designated as a subsidiary. In October 2003, Unilever Ghana Limited acquired 58.45% shares in Benso Oil Palm Plantation Limited from Unilever Overseas Holdings/CWA Holding, a company based in the United Kingdom.


1.2 Statement of the Problem

The manufacturing industry today is an integral part of the Ghanaian economy. The manufacturing industry has gone through some transitions to its current state. The industry over a number of decades now has experienced great decline and as a result most of the organizations have closed down due to poor performances. In this light, successive governments have made great stride to improve this industry by way of reviving some of the dead organizations.

Moreover, the continued growth of an institution may depend on its ability to generate adequate resources from its day to day operations. Financial performance measurement or assessment is therefore imperative in assessing the growth and progress of a business. Assessing the financial position of a company in a likewise manner requires examination of its past and current performance in order to predict its future prospects. By using financial performance measures, a company’s performance can be linked more closely to shareholder’s value and wealth. Attention can, thus, be directed to ways in which companies can create more value for shareholders. Therefore, this study seeks to adopt ratio analysis as a key financial performance appraisal method to examine, evaluate and interpret the growth trend of Unilever Company Limited.


1.3 Research Objectives

The purpose of the study is to assess the financial performance of manufacturing organizations for the period, 2009, 2010 and 2011 using Unilever Company Limited as a case study.

The objectives of the study include:

  1. To measure the liquidity position of Unilever Company Limited.
  2. To find out the profitability trend of the organization given its level of investment and turnover.
  3. To find out the level of gearing and investment ratios of the organization.
  4. To assess the performance measurement policy within Unilever Company Limited.

1.4 Research Questions

  1. What is the liquidity position of Unilever Company Limited?
  2. Given their level of investment turnover, what is the profitability trend of the organization?
  3. What is the ratio between the levels of gearing and investment of the organization?
  4. What performance measurement policy is adapted within the organization?

1.5 Research Hypothesis

  • H0: There is no significant relationship between ratio analysis and the financial performance of an organisation.
  • H1: There is significant relationship between ratio analysis and the financial performance of an organisation.

1.6 Significance of the Study

This study gives insight into the various ways or techniques that will help improve organizations performance and how the financial performance of organizations in Ghana can be properly assessed. The study will also go a long way in showing the various accounting techniques that managers can adopt in measuring financial performances, and its implications on the financial position of organizations.

The findings and recommendations of the researcher will help in building a strong and better accounting practices that will help in the assessment of organizations performance in Ghana, if taken seriously by government and the general public. It may serve as a reference to other researchers who may want to research into the field.


1.7 Scope of the Study

The overall scope of the study is to assess the financial performances of Unilever Company Limited for the periods 2010, 2011 and 2011. Unilever Company Limited was chosen because it is near to the researcher and gathering of information also becomes very easy. The above periods were also chosen because; the researcher wants to assess the more recent financial performance of the company under study. With the assessment of the financial performance, the researcher will adopt the concept of ratio analysis tools and techniques. The scope in terms of location can be found in the Eastern Religion, Koforidua. This region was selected because of proximity to the researcher.


1.8 Limitations of the Study

Notwithstanding the concern for efficient, effective and dependable findings, there were few limitations encountered in the course of carrying out the study.

Among these include:

  1. Limited funds available to undertake the study.
  2. Attitude of Respondents: there was a poor response from respondents to interviews which brings difficulty in compiling and analyzing available data.
  3. Availability of Data: There was also the problem of getting data from the selected organizations. That is, there was delay in getting the data needed from the organizations .or not getting it at all.

1.9 Organization of the Study.

This research paper is organized into chapters, with the chapters being organized as below:

  • Chapter one – this chapter includes the general introduction, background information about the study, statement of the problem, objectives of the study, research questions, scope of the study, significance of the study, and the limitation of the study.
  • Chapter Two – this chapter reviews the related literature on the topic-Assessing the financial performance of Unilever Company Limited for the periods 2009, 2010 and 2011. This chapter considers both the empirical and theoretical literature available on the subject matter.
  • Chapter Three – this chapter deals with methodology of the research. That is the various methods that the researcher adopted in carrying out the research. This chapter includes the study site, research design, data collection methods, data analysis and limitations.
  • Chapter Four – this chapter is concerned with the discussion of Data, analysis of data and the interpretation of the data collected. That is, how the data was processed, presented, arranged etc. to bring out the meaning in them so to help achieve the objectives of the study. The chapter is made of absolute figures, charts, tables etc in analyzing the data collected.
  • Chapter Five – Summary of findings, Conclusion and Recommendations. This chapter deals with presentation of findings, making conclusions from the findings of the study and its implication. It considers recommendations and suggestions based on the findings of the study.

Chapter Five


Summary of Findings, Conclusion and Recommendations

5.0 Introduction

The Golden age of business has been the focus of the Ghanaian economy from the year 2001; this is to promote business and industrial growth. At the core of this dream is the manufacturing sector, which is supposed to be the springboard for the development of industries and the nation.

Over the years, the manufacturing sector has proven to be a force to contend with the government as the number one employer. This requires that the concerns and obstacle to their growth be addressed and policies championed to promote the growth of the Ghanaian industry and manufacturing sector.

This chapter concludes the study. The chapter gives a summary on the findings and analysis made on the data gathered. It makes recommendation on how Unilever Company Limited can further improve on its financial performance.


5.1 Summary of Findings

The study has revealed some interesting paradigm in the general and specific application of financial performance analysis to corporate performance especially to Unilever Company Limited. Ratios, tables and were used as the main models of analysing the financial statement.

The research on the topic: “assessing the financial performance of manufacturing industries” by the researcher came out with the following major findings with respect to the objectives:

5.1.1 Research objective 1: “To measure the liquidity position of the enterprise”

The researcher found that the liquidity position of the company was quite impressive. This is simply because the current ratio for the year 2009 showed 1.36 and it reduced in the subsequent year (2010) to 1.2 and again rose to 2.6 in 2011. This was due to the fact the management of the company was able to match their current liabilities with that of their current assets very well. The researcher found out that this impressive performance was due to a long term loan sourced for the acquisition and investment in capital assets but was channelled to the payment of short term creditors in the previous year and investment in inventory.

Findings from the research also showed that the quick ratio that measures the ability of the company to meet its short term obligations was not quite impressive but was better in the year 2011 as it recorded 1.7. This was due to the fact that the company has less cash at hand to defray its liabilities. The researcher also found that the company faced a little problem with respect to cash at hand to defray liabilities incurred during operation.

The researcher in all noticed that, the liquidity ratio for the years is not very impressive but for Current ratio it was quite impressive. This is so because the enterprise relies heavily on letters of credit and short term loans.

5.1.2 Research objective 2: “To find out the profitability trend of the enterprise given its level of investment turnover”

The researcher found that there was an impressive performance of Unilever Company Limited with respect to their profitability trend. The researcher found out that the gross profit for 2009 was quite better than that of the subsequent years (2010&2011) and this was due to the fact that management was able to reduce cost and improve turnover in 2009. From the data and analysis made, the researcher found out that the overall profitability of the Unilever Company Limited has been favourable in spite of the soaring business environment and unfavourable economic conditions during the years under review. This was due to management’s ability to be the market leader in terms of innovation and setting of service quality standards.

5.1.3 Research objective 3: “To Measure the Level of Investment Ratio of the Enterprise”

From the data and analysis, the researcher found out that the effects of earning to the investors are significant. It was found that the investor ratio continues to rise in the case of return on equity because the return that went to shareholders was more in 2011, which was 64.7% followed by 2010 which is 46%. The earnings per share for 2011 were better as compared to the previous years (2009 and 2010) due to the fact that management was not all that efficient in 2010. However, on a progressive note, the researcher found that management seem to be doing better as the year’s role on. The investment is however secured as profit is able to cover the current year’s dividends. These can be attributed to factors such as High after tax profits that are attributed to ordinary shareholders. In all, the researcher noticed that the level of investment ratio of Unilever Company Limited was quite impressive.

5.1.3 Research objective 4: “To Examine the Level of Gearing Ratio of the Enterprise”

The researcher found out that the debt to equity ratio increased in only the first two years and declined substantially for the year 2011. It can be inferred from the debt to equity over the subsequent year (2011) was favourable in that the ratios recorded were less than one. This was due to management’s ability to finance most of its operations through letters of credit from its bankers and not necessarily relying on long term loans. The researcher noticed that the company was highly geared as its debt to equity was more than 100%.


5.2 Conclusion

Unilever Company Limited in the manufacturing industry has contributed immensely towards the growth of the nation. Financial support is the most vital area to promote industries in Ghana. Apparently, the foregoing analysis suggests that, the government has since independence been making impressive efforts to assist businesses in the form of credit. Banks must be encouraged to review interest rates charged on loans granted to manufacturing companies such as Unilever Company Limited to help them engage on expansionary projects. Despite the turbulent market conditions the company faces in its business environment, the company has generally performed well. The huge investment made which are aimed at upgrading the efficiency of the company’s operations, distribution and marketing systems, together with the expansion and improvement in the skills and capabilities of the staff would give the company the capacity to weather the economic storms and capitalise on opportunities in the market for breakthrough in the industry.


5.3 Recommendations

Unilever Company Limited has shown an impressive performance as the study shows. Yet there is a greater opportunity to succeed as the Ghanaian economy moves from extraction to processing. Recommendations are hereby made, in order to help improve upon it activities as the company seeks to be the market leader among its competitors.

  1. The company needs to continually have a competent management team in place to enable it to develop excellent products and services to sustain its operations.
  2. Recruiting, developing and retaining the best talents seem a challenge area for the company. It is recommended that the business reviews its Human Resource policies to address this trend.
  3. The major operational challenge of improving cash flow to meet working capital requirements and accelerate value creation should be their preoccupation. This will reduce the overdependence on letters of credit, overdraft and its huge financial cost.
  4. The current product portfolio should be reorganised, while all business processes should continue to be reviewed to increase productivity and enhance efficiency. The company should find out how much different customer groups are willing to pay for its products so as to ensure products are developed to meet their needs.
  5. The reporting period of the company needs to be improved since there is delay in the reporting process. This will enhance early detection of unimpressive operations so that corrective measures could be taken earlier for a good future growth prospects.
  6. The operating cost as well as the operating expenses of the company must be cut down so that the company can be able maximize their profit effectively.

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