CHAPTER ONE
1.1 INTRODUCTION
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.
In so doing, this project has been divided into different chapters, each discussing vital point or aspects.
The first chapter centers mainly on the purpose of the study, its
objectives, significance and limitations associated with it. It will
help to highlight problems relating to the ratios and it’s use.
The next chapter is just a simple discussion on the financial ratios.
It is the literature review of this project. It tells us what different
authors have said on in relation to this topic and also their points of
view on the topic.
Chapter three is a belief narration on how the research of this
project has been carried out, the difficulties encountered and the type
of facts and sampling, I here based this project on.
The last two chapters on the other hand is pre - detailed analyzed here are datas gotten from union bank of Nigeria PLC, Enugu.
From this, I was able to draw some conclusion and deduced facts which have all been summarize in the last chapter.
Various means have embarked on to make this project possible.
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 STUDY
The objectives of this project is to present a through study of the
financial ratios and to throw more light on its importance in the
business world.
Also to show how financial ratios and statement guide the long term
investor by providing them with long term earning power of the firm.
Again to show how creditors to form depends on financial ratios to know the liquidity margin of the firm.
1.4 RESEARCH QUESTIONS
This question will act as a guide for data collection.
v Can financial ratios be used to analyze the economy?
v How often do individual and firms use ratios as guide to economic decisions?
v What are the significance of financial ratios
v What are the limitations of financial ratios
v What are the solutions to these limitation.
1.5 RESEARCH HYPOTHESIS
This project will produce to test the following hypothesis.
MAIN HYPOTHESIS
Financial ratios are not widely used as guide to investment decision due to ignorance especially to individuals.
SUB HYPOTHESIS
- Poor knowledge of application of ratios by bank staff.
- Confidence in the use of ratios in future.
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:
v The ability of the firm to meet its current obligations
v The extent to which the firm has used its long term solvency by borrowing funds.
v The efficiency with which the firm utilizes its various assets in generating sales revenue and
v The overall operating efficiency and performance of the firm.
1.7 LIMITATIONS OR SCOPE OF STUDY
This project centers on financial ratios. A very through research on
this study is not very possible in that interviews and questionnaires
have to be limited since only little sector of the population utilize
the ratio.
Time factor is also another notable factor. Nobody seems to have time
to even fill use questionnaire due to pressing engagement. Also,
combining this project with my other academic work has been very and at
times interviews has been put off due to the work load I have and the
time available to do it.
Another important factor also arises during the collection of data.
You find out that people are not ready to talk on any issue in which
bank is involved. They tend to fed that any information given will
implicate them in some ways. So most individuals try as much as possible
to give a rosy picture of the entire producers even though things do
not happen that way.
1.8 DEFINITION OF TERMS
For complete understanding of this project, these terms have been defined.
Ratio - The indicated quotient two
Mathematical expression
Financial ratio - The relationship between two
Accounting figures expressed
Mathematical.
Economic analysis - identifying the economic
Strengths and weaknesses of
The Firm.
Liquidity ratios - ability to meet current obligation
Activity ratios - the firms efficiency in utilizing its
Assets.
Leverage ratio - The proportions of debt and equity
In financing the firm’s assets.
Profitability ratio - The measurement of the overall
Performance and effectiveness of
the Firm.
ABBREVIATIONS
NPAT - Net profit after tax
EPS - Earning per share
ROCK - Return on capital employed
ROA - Return on assets
NBIT - Net profit before interest and taxes.