Ratio Analysis As An Important Tool For Evaluation Performance In The Banking Sector (A Case Study Of Union Bank Of Nigeria Plc)

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Ratio Analysis As An Important Tool For Evaluation Performance In The Banking Sector (A Case Study Of Union Bank Of Nigeria Plc)

Table of Content

  • Title page
  • Certification
  • Dedication
  • Acknowledge
  • Table of content

Chapter one


  • 1.1 Background of the study
  • 1.2 Statement of the problem
  • 1.3 Aims and objective of the study
  • 1.4 Significance of the study
  • 1.5 Scope of the study
  • 1.6 Limitation of the study
  • 1.7 Definition of terms
  • 1.8 Organization of the study

Chapter Two

Literature Review

  • 2.1 Introduction
  • 2.2 Conceptual issue
  • 2.3 Nature of finance ratio
  • 2.4 Theoretical frame work
  • 2.5 Empirical review

Chapter Three

3.0 Methodology

  • 3.1 Historical background of union bank of Nigeria PLC
  • 3.2 Estimation techniques
  • 3.3 Sources of data
  • 3.4 Method of data collection
  • 3.5 Method of data analysis

Chapter Four

4.0 Presentation and Data Analysis

  • 4.1 Presentation and Data Analysis
  • 4.2 Analysis and Interpretation of Data
  • 4.3 Discuss of Findings

Chapter Five

5.0 Summary of Findings, Conclusion and Recommendations

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

Chapter One


1.1 Background of the Study

Financial information which serves as the basis for financial and decision making is needed for production evaluation and comparison of a firm (Pandy, 1999).

Financial statement are means of carrying or conveying to management and to interested outside a concise picture of the profitability and financial position of business.

They constitute a report of management performance affecting to managerial success or failure and flashing warning signal of impending difficulties.

The financial statement shows the financial position of the business as the time of report and also the operating result by which the company arrived at its time of report and also the operating result by which the company arrived at its position.

They only give some information about financial event. Before users of financial statement can read meaning to the array of data or information contained in it, a thorough analysis and interpretation of the data has be done using certain analysis tools.

The objective of business enterprise in publishing financial statement is to assist decision makers or users in evaluating the financial strength profitability liquidity and future prospect of the business entity. This objective cannot be justified or accomplished if users do not read meaning or understood the financial statement published (Meig and Meigs, 1994)

Financial statement of a firm includes income statement balance sheet, director’s reports auditor’s report, note to the account value-added statement, cash flow statement and five years financial summary (Frank Wood 1996).

There are various users of financial statement of a firm, they include management shareholder, auditors, employees, government etc. and each of them has their own area of interest.

For example, management are interested in profitability growth stability, dividend policy of the company etc. all being mentioned need to be measure using tools or techniques (colwe1996)

The following are various analytical tool techniques:

  • Accounting ratio
  • Value added statement
  • Cash flow statement.

The focus of the research is based on accounting ratio, because it Is the most powerful and company used of all the tools. Accounting ratio is a proportion between one item in a same of financial statement (Igben 1999)

This study classified ratio according to John and Oriot (1996) and Aborode (2005) precisely speaking accounting ratio is the yard stick for evaluating financial position and performance of a firm.

This study aim at the impact of ratio (accounting) analysis as it encompassed the present financial position, future financial capacity analysis and comparative relationship of these to the financial position of the firm.

Accounting Ratio:

Shows the relationship of result of the firm’s activities.

The interpretation of the final account and the balance sheet could therefore be carried out using the accounting ratio, so obtained from the activities.

The analysis may for example be a banker considering loan to firm. He is primarily interested in the firm’s near term on liquidity position so he stresses ratio that measure liquidity.

Value Added Statement (ASSC):

In 1975, defined Value Added Statement as the wealth the reporting entity has been able to create by its own end its employee’s effort. The value added statement is the difference between the output and the input of an entity as measured in financial terms, it is the wealth created by an entity through the joint effort of the entity and of its employee using funds provided from eternal services and internally generated.

A Value Added Statement is a report which shows the monetary wealth created by an organization during the period under consideration and how this monetary wealth employee’s government provides of capital and retention for growth and expansion.

Cash Flow Statement:

The cash flow statement provides information about the cash receipts and cash payment on an enterprise over a given period. It indicates the pattern of cash generation from the operation or through new capital raised and how payments are made for taxes, dividends new investment and debt. It is designed to shed light on enterprises.

1.1 Statement of the Problem

Financial statement is said to show the type of the company serves as a basis for decision makers in evaluation of the financial strength, profitability and future prospect of a business entity. The users have no been able to the true picture because they can not interpret and understand the financial statement as a result of the technicalities of accounting language.

Even the additional notes to the account to a layman other problems than leads to this study.

  1. What types of tool is be employed or adopted in comparison of present and past performance and how the tool could be implement to make good comparison.
  2. Will the analysis of the financial statement be important to the general public and prospective investor?
  3. What will be the effect of ratio analysis on the future prospect of a banking industry.

1.2 Aims and Objectives Study

The main objective of this study is to evaluate the impact of ratio analysis, is measuring corporate performance of an organization. Effort are made to evaluate the following.

  1. The ability of the form to meet its current obligation the extent to which the firm has used its long-term solver by borrowing funds.
  2. The efficiency with which the firm is utilizing its asset generating sales revenue end.
  3. The overall operating efficiency and performance of the firm end.
  4. To interpret the result to different user for decision.

Other objectives include:

  1. Identify the needs for performance evaluation of corporate organization.
  2. To analyze the financial statement of Union Bank PLC using Accounting Ratio.
  3. To assess the impact of such financial ratio analysis on the present and future performance of Union Bank PLC.
  4. Measure the strength and weakness opportunity and threats facing the organization in using the result of analysis.
  5. To give information that will assist existing and potential investor to utilization their judicious from the analysis of the bank financially statement.

1.3 Significance of the Study

The banking industry is one of the fastest growing industry in Nigeria economy in the banking sector Union Bank PLC is a major player. The company has realized that it needs to pay particular attention to its financial position and performance.

It is hoped that this study would assist the company to that effect; the study reference to accounting ratio as a measure of financial analysis to other such as value Added Statement, cash flow statement giving it effectiveness preference similar studies.

The significance of this study are:

To management:

The management is assisted in putting firm resources in the most effective manner to maximum return on equity investment.

To invest:

It enable investor to evaluate financial position of the company and his assist in making optimal investment decision.

To credit:

It enable them to assess the firm financial capacity and ability in meeting its financial obligation as at when due.

To employees:

It will assist the employees, an organization to know how to go about negotiation for better incentive imported working condition.

To the economy as a whole:

It will aid economic growth such at funds appeal out from surplus unit can be efficiently and prudently distributed to the deficit of the economy. This consequently led to growth in investment and productivity in other sector.

1.4 Scope of the Study and Limitation

The basis of the study essentially appraises the impact of ratio analysis in measuring corporate performance. This study is restricted to Union Bank PLC Ilorin. Attempts were made discuss the need to uses and interpret ratio for public and management purpose. The study critically examines the various classification and computation of accounting ratio using financial statement of Union Bank PLC.

Ratio computer were used for internal financial comparison over a period of five 2002-2006.

1.5 Definition of Terms

(1) Asset:

An economic resource that is expected to be of benefit the future (pandey 1999).

(2) Financial Statement:

They are statement that includes profit and loss account, balance sheet, cash flow statement note the account, value added statement, Director, report auditor’s report five years financial summary, group financial statement (Frank 1996).

(3) Ratio:

This is defined as the mathematical relationship between two accounting figures (Pendy 1993).

(4) Ratio Analysis:

This is systematic production operation both internal and financial report so as to summaries the key relationship and result in order to appraise financial performance (Lucey 1988).

(5) Re-construction:

It is a general term indicating a re-organization in the equity holding a company.

(6) Shareholder:

They are equity owner of company, a person who own in a corporation.

1.6 Organization of the Study

This research work was divided into five chapters.

  • Chapter one covered the introduction aspect, significance of the study, statement of the problem, aims and objective of the study, research methodology, scope and limitation of the study and organization of the study as well as definitions of terms.
  • Chapter two contains literature review of previous research work, relevant journals of the study and actual organization of the study as well as definition of term.
  • Chapter three deals with the methodology of the research that is employed in the study, source of data, data collection and analysis instrument as well as collection method.
  • Chapter four tackles analysis and presentation of public financial statement union bank plc for period of five years and interpretation of financial statement via ratio analysis.
  • Chapter five contain summary, limitation and recommendation based on finding of the study.

Chapter Five

5.0 Summary Finding Conclusion and Recommendations

5.1 Summary

There is no doubt about ratio analysis is begin important tool for measuring the financial strength weakness opportunities and threat of a firm

As a way of facilitating meaningful comparison the financial statement of union bank plc is being evaluating for a period of five years as a single ratio itself does not indicate favorable or unfavorable condition via different type of ratio like capital adequacy asset quality, profitability, liquidity, leverage activity and investor ratio.

The finding have revealed that union bank of Nigeria plc is doing well in term of profit and the management are very efficient in managing company’s asset.

The company used more debt compared to its equity as revealed by the leverage ratio and also liquidity ratio computed throughout the five years does not meet the normal standard ratio. Also capital adequacy ratio and asset quality ratio calculated meet the standard asset by BOFIA

5.2 Conclusion

From the analysis of the research data sources from the annual report of union bank of Nigeria plc from 2002 to 2006.

It could be seen that union bank showed outstanding performance by having enough and adequate capital to cover up their total asset, loan and advance. The assessment is used on the standard set by BOFIA and international standard, which are 5% and 8% respectively.

Although variation exist within the five year financial summary being consider all ratio calculated are much more above standard for instance uncle EQUITY TO TOTAL ASSET union bank should adequate in their capital from 2002 to 2006 but much more performance in 2006 and other years.

It is generally agreed that the ratio under QUALITY should to be less than 20% it could then be seen that the bank has been able to excel in this area all the calculated are more than 20% set as standard. This ratio emphasize on the quantity of the asset of the bank, it could also be seen that the bank been able to control their non-performing loan (classified loan) by being able to maintain the 20% standard.

THE INTREST INCOME TO LOAN AND ADVANCES of union bank calculated under profitability ratio showed a decrease from 2002 to 2006. This show that union bank have not been advance able to make income from loan and advances in recent years compared to previous years. The higher the ratio, the better will be for the bank under INTEREST PAID TO TOTAL DEPOSIT Union bank improved greatly from year to year as the lower the ratio the better for the bank as it has been seen under profitability under bank has show that it’s going concern as the liquidity ratio calculated meet up with set standard.

The ratio calculated ranging from loan and deposit all meet up with standard by been above 20% it should however be noted that some at those ratio do not meet up with the 40% standard set because the bank has shown that they give out loan and advances to their customer. This an attributes of the bank efficiency rendering quality services to their customer so also other ratio calculated that is current ratio and cash ratio. Union banks go ahead of the standard 2.1 and 1.1. respectively by showing improvement variation from years to (that is from 2002 to 2006).
Finally in view of the calculated ratio union bank could be said to be insolvent as at 2006 financial years.

The bank ability to meet its long term debt obligation was measured through the computed gearing leverage ratio.
It could be observed that the union bank at early years was highly geared but later fall in 2006. This showed that the financial risk of owner has reduced in 2006.

Also the fixed asset is more than the capital employed by the owner. This is equally suggested that some of the asset were bought by fund introduced by the creditors. The coverage ratio of the bank has remained that some over time.
The earning per share ratio calculated under inventories ratio as shown increase in this ratio at initial years but fall in 2006. This may not have been unconnected with the increase in the number of ordinary shareholder.

Based on the theory of Edward Altman (1968) known as ALTMAN MODEL he established guideline Z-score which can be to classify firm as either financially sound or otherwise the gave z-score of 2.675 as the appropriate the higher the score and the better for firm.

Base on the analysis of Union Bank of Nigeria Plc which bank does not meet the required z-score as given by ALTMAN MODEL and thus effect should be made by the management of the bank to improve their financial position.

5.3 Recommendations

Based on the analysis carried out on the financial statement of Union Bank of Nigeria Plc over a period of five years, the following are recommended for improving the operation of the company

  1. Variation ratio should be calculated by the management and should be include in the report so that user will be able to understand at a glance.
  2. The industrial average should be gotten and compared with the ratio computed so as to know whether the company is performing or not.
  3. The financial statement should be prepared on a union based to make analysis easy.
  4. The company should endeavour to stabilize the profitability important in the mind of man garment and investor by which the liquidity position will be improved upon.
  5. Due to the difficulties encountered by this research work the research suggests the following area for then research
  6. The industry average should be gotten for comparison with the computed ratios.

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Frequently Asked Questions

What is ratio analysis in financial management?

Ratios Analysis Ratio analysis is the quantitative interpretation of the company’s financial performance. It provides valuable information about the organization’s profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements. read more

How do companies use ratios to evaluate financial performance?

Trend line Companies can also use ratios to see if there is a trend in financial performance. Established companies collect data from the financial statements over a large number of reporting periods.

What is the importance of financial ratios in banking?

The financial ratios would computed a s an indicator to e valuate the financial position of the bank. For this reason, essential variables which are highly correlated with the enhancing the overall performance.

Do financial ratio analysis variables affect firm profitability of listed banks?

Empirical findings of the study indicate that financial ratio analysis variables of Earnings per share (ID), Interest Repetition (IR) and Current Ratio (TR), which are directly related to return on Assets (ROA), have a significantly positive impact on firm profitability of listed banks in ISE. 


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