Effect of Accounting and Financial Ratios as a Means of Measuring Organization Performance (Case of Cadbury Nig. Plc, Ikeja Lagos)
The research work effect of Accounting and financial ratios as a means of measuring organizational performance using Cadbury Nigeria Plc as a case study. The objectives of the study are to ascertain how financial ratio serve as a measure, performance of the company, to know the performance in relation to debt management ratio, to know the liquidity, leverage, profitability and market value ratio of the company and to find out the performance of the company in relation to asset management ratios. The methodology of the research work is through administration of questionnaire, abstraction from articles and it is worthy of note to state that the main data was from the annual financial report of Cadbury Nigeria Plc. After the analysis of the data collected, the findings are the current ratio of the company increased from 1.55 times in 2012 to 1.82 times in 2013. The profitability ratio increased in 2013 compared to 2012. The company (Cadbury Nigeria Plc) did better in 2013 than 2012. It is recommended that the company should work on its ability to meet its short term financial obligation, as the current ratio shows its ability to meet its short-term obligation is not so high. The organization needs to strategies ways to reduce its average collection period. The organization should seek equity financing instead of relying on creditors more to finance its operation.
A good financial plan for any functional organization has to be related to the existing strength and weakness of such organization. In order to discover the aforementioned factor, it becomes necessary to evaluate the performance of such organization over a given period. Financial ratio analysis therefore is one of the methods used in determining the level of performance of an organization. Ratio analysis is a powerful tool of accounting and financial analysis . In financial and account analysis, a ratio is used as an index or yardstick for evaluating the financial position and performance of a firm or company. The compilation of trading profit and loss account and balance sheet represents the end product of series of transaction which have taken place over a particular period of time. In order to make use of the balance sheet, the user need to analyze and interpret their significance and in so doing, they may find out that the accepted form of accounts and balance sheet is not easily followed by the layman. Therefore he designs the account so that the figures becomes more intelligible to these without expert knowledge in accounting. The first stage in analysis, is the development of a systematic review of the accounting data with the aid of accounting ratio which shows the aid of the result of their firm. The interpretation of the final account and the balance sheet could be carried out using the accounting and financial ratio obtained from the result of the activities. But before any interpretation is undertaken of the activities, view of the person requiring the information must be considered and understood.
This project work shall critically look at the following:
- Financial Ratio Analysis
- Need for financial and account ratio analysis
- Psychological effect of comparison
- Requirement of effective comparison
- Significance of ratio
1.01 GENERAL DESCRIPTION OF THE AREA OF STUDY
A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise’s financial statement, often used accounting. There are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potentials shareholders (owners) of a firm and by firm’s creditors. Financial analysts use financial ratio to compare the strengths and weakness in various companies. Ratios can be expressed as a decimal value, such as 0.11 or given as an equivalent percent value, such as 10%. some ratios are usually quote percentages, especially ratios that are usually or always less than 1, such as earning yield, while others are usually quoted as decimal numbers especially ratios that are usually more than 1 such as P/E ratio. Values used in calculating financial ratio are taken from the balance sheet, income statement, statement of cash flows or the statement of retained earning.
These comprise the firms accounting statement or financial statement. The statements data is based on the accounting method and accounting standards used by the organization. Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Ratios generally are not useful unless they are benchmarked against something else like past performance or another company. Thus, the ratios of firms in different industries which face different risks, capital requirements and competition are usually hard to compare.
1.02 HISTROICAL BACKGROUND OF CADBURY NIG. PLC IKEJA
Cadbury Nigeria is a member of the Cadbury Schweppes Group, a major player in the global confectionary and beverages markets with over 40,000 employees and business operation in 200 countries. Cadbury Nigeria has a portfolio of brands that are market leaders in the confectionery, food drinks and foods categories. Cadbury initial objectives in the 1950s to source cocoa and prospect for a market in Nigeria. Led to establishment of a manufacturing facility in Ikeja, North of Lagos. In 1965, Cadbury’s Nig Plc was incorporated as an autonomous arm of Cadbury Schweppes group in 1963, while the actual production of Bourvita started in May 1953. The company has since grown organically to become one of the leading manufactures in Nigeria. The Cadbury Nigeria Plc has maintained their portfolio brand their dominant, market position in 1994. Thus, confirming the strength and stability of consumer loyalty to the company’s product. The company’s product line ranges from tom-tom, malta sweet, Bournvita, pronto, tomapep, Bazooka, Bon-Bon, Knor cubes, poundo-yam. While its other product include panazone, flower and air-fresher, Dadawa seasoning cubes and chef tomato paste are new established brands gaining shares on the basis of quality.
1.03 STATEMENT OF PROBLEM
Ratio deals mainly in numbers, they don’t address issue like product quality, customer service, employee morale and so on, though those factors play an importance role in financial performance. Since the ratio don’t address these other factors, it becomes difficult to ascertain the attributes of these factors in performance of the organization. Meaning the quality of product, morale of employees’ and customer service can’t be known or attributed to the performance of the organization. Also ratio largely look at the past, not the future.
However, investment analysis will make assumption about future performance analysts will make assumption about future performance using ratio, but these assumptions could be wrong, as the analyst make use of the data in the financial statement which could not be the true position of organization because often times, an organization may manipulate the data in the financial statement. Furthermore, financial ratios, like the financial statement, they are based on, do not capture all the important information that tells stakeholders how the business is doing currently and help them predict where its going in the future. One of the key determinant of business success is the quality and experience of the management team, but this information cannot be derived directly from financial ratio and when the management’s quality can not be ascertained, it pose a treat to the owners, investors, creditor and the general public, as they may not be able to ascertain the quality of the management, which is one of the key determinant of the success of the organization.
1.04 OBJECTIVE OF THE STUDY
The main objective of the study is to evaluate the effect of accounting and financial ratios as a means of measuring organizational performance. The specific objectives are as follows:
- To ascertain how financial ratio serve as a measure of performance of the organization.
- To find out how financial ratio analysis measures the organizational performance in relation to debt management.
- To know liquidity, profitability and market value ratio of the organization.
- To ascertain the performance of the organization in relation to asset management.
1.5 RELEVANT RESEARCH QUESTION
- To what degree does financial analysis serve as a measure of organization performance?
- To what extent does financial ratio measure the organizational performance an relation to debt management
- To what degree can financial ratio analysis help to know the liquidity, profitability and market value of an organization?
- To what extent can financial ratio analysis ascertain the performance of an organization in relation to asset management?
1.06DELIMITATION (SCOPE) OF STUDY
The research will evaluate the effect of accounting and financial ratios in measuring performance in manufacturing industry, using Cadbury Nigeria Plc, Ikeja Lagos State as a case study. It will be limited to accounts of 2012 – 2013 financial year.
The researcher assumes that financial ratio can be used to measure the performance of the unit of study (Cadbury Nigeria Plc, Ikeja Lagos). Also that equity holder of the organization can ascertain the ability of his firm to pay dividend and avoid bankruptcy. The management can use financial ratio to ascertain the effective internal control of the firm and efficient asset management.
1.08 SIGNIFICANCE OF THE STUDY
The significance of the study cannot be over emphasizes. It will enable interested parties to know how profitable a business is. It will also be useful to the share holder of Cadbury Nigeria Plc Ikeja, because they will be able to access the performance of their company. This will give them (Cadbury Nigeria Plc Ikeja) opportunity of deciding the researchableness of their investment or justification of their investment. It will also be useful to investor in the area of investment decision making. They will be able to know “what to buy” “when to but” where to buy” and “how to buy” (Structures) likewise, they can also know the right time to sell and what to sell it will be useful to managers to access their performance whether they are efficient or not. More so, they can also determine the area in which they are effective and the area in which they need to improve.
It will be useful to fund providers like bank, finance house, loan providers. It gives them the opportunity of accessing the assurance of getting their fund back with interest. It will be useful for financial analysts in determining the trend of Cadbury Nigeria, Plc Ikeja and decide which area their expert opinion should focus. It will also be useful to government agencies in the area of policies formulation to regulate the economy.
Moreso, this research work will serve as a good basis for further academic research work.
The general public can also use this work to have reasonable knowledge of company performance so as to compare companies and even decide whether the company is socially responsible or not.
1.09 DEFINITION OF TERMS
- Financial ratio: It is a techniques used in reducing aggregate financial data into meaningful quotients
- Ratio: The quotient of two mathematical expression it can also be defined as relationship between two or more.
- Analysis: Examination and division of a business related situation or problem into major element in order to understand the items in question and make appropriate recommendation
- Equity Holder: Owners of the company
- Management: This is the decision making body of an industry organization. It is the group of person who manages the company’s affairs.