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THE EFFECT OF FINANCIAL RATIO ANALYSIS ON INVESTMENT DECISION

Abstract

This study was on impact of financial ratio analysis on investment decision. The total population for the study is 200 staff of GUINNESS NIGERIA PLC. 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

1.1Background of the study

Business enterprises are in operation basically to provide goods and services which will satisfy the needs and desires of customers at a lower cost and in return will maximize their profit effectively on the services rendered by them. It is the responsibility of the management of a business enterprise to make sure that the activities being carried out by their enterprises are properly and documented.

The recording of the business operation should be prepared in monetary term in a manner that the various interested party to the company’s financial statement will have the opportunities to determine whether the business is performing well in its functions or otherwise. The management is totally responsible for the” planning, organizing, coordinating as well as controlling and making corrective decision that seeks to the progress and advancement of the business organization.

 

Decision making is a managerial function. It requires the assessment or analytical study of past, present operation future prospects and the probable outcome of decision which could be made. One important instrument which has helped business over the years in this area is the financial ratio analysis.

Financial statement in order to gain insight into the financial position and performance of a business enterprise. It is the relationship between financial data in the financial statement to aid in the evaluation of the business strength and weaknesses. It also provide us with information that is useful for investment decisions such as “should we acquire ABC corporation or otherwise? It encompasses a variety of accounting ratios that reflect on a particular events, results or existing conditions.

The financial statement is an accounting statement showing the profit and loss account of a business firm for a particular year, also the balance sheet, showing the financial position of the company. Various users include specific interest and needs.

 

The users include the following bodies such as; the management, shareholders, creditors, government employees, customers, financial analysts and advisers as well as competitors. It is from this statement drawn their conclusion the company’s performance, its managerial ability and competence as well as the future prospect of the business under consideration.

Investment decision is the allocation of a firms capital finds to investment proposal to yield future benefit that will meet up the expectation of all investors in a company.

This research work therefore, intends to find out the impact of financial ratio analysis on investment decision in a multinational organization, using GUINNESS NIGERIA PIc located in Ikeja as a case study.

1.2 STATEMENT OF THE PROBLEM

Investment decision is one of the most critical and crucial decision of an organization. It is a very important decision for the growth and survival of most organization in Nigeria.

The problem of this research study shall centers on the reason why business fail to prosper in the function. (i.e. achieving their objective of profit making) enterprises fails to achieve their targeted goals due to wrong choice of investment decision taken which may result from the followings:

Inadequate fact data or information about the project being under taken.

The wrongly analysis of the technique use for company’s evaluation and performance.

Insufficient availability of investment analyst and expert that can give “advice on what, where and how to invest one’s resources.

  1. Difficult to decide on a proper basis for comparison because organization ratio have meaning only when they are compared with some standards.

 

  1. There is inherent assumption that the historical data used for ratio analysis are inviolate fixed and applicable under all situations, however the dynamic of political and economic factors may prove such data as out of date”.

 

1.3 OBJECTIVE OF THE STUDY

The general purpose of this study is to examine and analysis the impact of financial ratio analysis on investment decision in a multinational organization (GUINNESS NIGERIA PLC). These are:

To examine the commitment of resources with the expectation of realizing future benefit over a reasonable long period in the future.

To determine how matters relating to dividend policy affect the organization stability.

To examine how Investment decision affect the future profitability either by way of increase in revenue or cause an increase in efficiency and reduction in cost.

  1. To examine” the factors that determines the growth and survival of the organization over-time

 

  1. To make recommendation to the management, shareholders and investors on how to execute their investment plans.

 

1.5   RESEARCH HYPOTHESIS

HYPOTHESIS 1

Ho: Commitment of resources does not lead to realization of company’s objectives.

Hi:  Commitment of resources lead to realization of company’s objectives.

HYPOTHESIS 2

Ho: Investment decision does not affect the future profitability and cost reduction.

Hi:  Investment decision affects the future profitability level, efficiency and cost reduction

1.6 SIGNIFICANCE OF THE STUDY

The research study is being conducted with the primary aim to provide useful information to the GUINNESS NIGERIA PLC under study in particular and to other company on matters relating to investment

The study also attempts to provide valuable information to management concerning their internal control, profitability and efficient of management of assets. It also aims to provide sufficient information to shareholder on a company’s profitability’s stability and potential for growth.

The study attempt to provide good information to creditors on the ability of a firm to pay interest and repay the principal sum on a due date.

It will also benefit the government by supplying them information on a business profit made by a company in order to assess tax liabilities and other information concerning a business enterprise.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

This work endeavour to examine critically what exactly is meant’ by any financial ratio analysis, its implication and how it can be used by the management on Investment decisions. It shall also make an insight on the accounting ratios in the interpretation of financial statements and reports to social statements and report to see how it would be useful to the useful to the users. It also centers on GUINNESS NIGERIA PLC. However, time constraint to and financial impediment on this research work has led to inability of covering numbers of organization.

OPERATIONAL DEFINITION OF TERMS

 

Liquidity Ratio: These are ratio that reflects the ability of a firm to meet its short-term obligation using assets that are most readily converted into cash.

  1. Long Term Solvency and Stability Ration: These are ratios concerned with the ability of a company to meet its long-term obligation.

iii. Profitability and Efficiency Ratio: These are ratios concerned with relative profitability and efficiency of utilization of resources of a business.

  1. Investor I Stock Market Ratio: These are ratio used in the stock exchange to enable them compare alternative investment.

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