This study aimed to examining the role of accounting ratio in
evaluating the companies’ performance through the use of financial
analysis methods in evaluating the performance of UAC Nigeria Plc. The
analytical approach, which is based on the analysis of the financial
statements for ten years was adopted in this study and the Analysis of
the balance sheets, the income statements and Financial Ratios, which
were the most recent between 2003-20012, were applied. The analysis of
the liquidity ratios clarifies that these companies have the ability to
meet its commitment on time, cover its liabilities but it should be
known the extent of the company’s preservation of the amount of the
current assets especially the cash to face its commitments and the
increase of cash in the company may lead to the risk of not utilizing
the current assets. And the current assets ratios should be the double
of the current liabilities so as the company can meet its commitments on
time. More so Market ratios of the companies fluctuated which is
considered as a negative indication that leads to a decrease in the
number of investors in the company and the opportunities in the company
as well. Hence, the companies have to increase their profits so as to
increase the share’s profit and so there will be an increase in the
return distribution ratios , and this gives a positive image of the
three companies to the investors which increase the company’s
investments , its profits and its sales. The study concluded by
analyzing the financial statements of the companies under study lead to
identify and explain the deviations and the undesired extreme results.
And through training the employees, it is possible to use other methods
to analyze the deviations that help in evaluating the company through
identifying the causes for these deviations. I recommended establishing
independent department for the management accounting in the company
to evaluate its performance through analyzing the deviations and treat
them and to provide qualified employees; scientifically and practically
to do the work of the company.
1.1 Background to the Study
The impact of financial ratios on the performance of a business
organization is becoming more apparent to users of financial statement.
Business’s performancecan be monitored with tools called financial
ratios which help to interpret financial information about the company.
According to Ofoegbu (2003), the more you know about how your business
is performing, the easier it will be for you to make informed decisions
about how to manage and grow your business.
Accounting ratios are widely used for modeling purposes both by
practitioners and researchers. The firm involves many interested
parties, like the owners, management, personnel, customers, suppliers,
competitors, regulatory agencies, and academics, each having their views
in applying financial statement analysis in their evaluations.
Practitioners use financial ratios, for instance, to forecast the future
success of companies, while the researchers' main interest has been to
develop models exploiting these ratios.
In the past decade of economic tendency, Nigeria as one of the
developing countries in the world has confronted various changes and
enlargement. Achievements of Nigeriaindustries deeply affect the
economic status of Nigeria. “The movement of foreign exchange has
increased rapidly as investors began to be involved more and more in
Meanwhile, investors will want to invest majorlyin good conduct
industries because they want to earn revenue in the short time period.
However, investors need to analyze the performance of the companies
properly before invest.
By doing the accounting ratios analysis, it will help them to
understand the performance of any company. The analysis of financial
ratios is a study of establishing meaningful relationship between
various financial facts and figures given in financial statement. The
basic financial statement included balance sheet and income statement
which is the indicating device of profitability and financial soundness
of business concern. Thus, analysis of accounting ratio is the procedure
of establishing and identifying the financial weakness and strengths of
Accounting ratios analysis has been view as a primary technique of
the analysis of financial statement from various aspects of business.
(Brigham & Houston, 2004) state” Ratio Analysis involves
comparisons. A company’s ratios are compared with those of other firms
in the same industry, that is, to industry average figures.” Ratio
refers to the relationship expressed in mathematical term among a set of
numeral and two individual links with each other in logical way. It is
based on the assumptions that single figure may not tell any useful
information but when expressed relative to another figure, it will
definitely give some meaningful information. Since ratio is a
mathematical relationship between two or above accounting figures, it
can be expressed in as a pure ratio, as a rate of times or as a
percentage. The relationship between two and above accounting figures or
group is called financial ratio. Financial ratios may be calculated in
different ways, using different figures (Gibson and Cassar, 2005).
Financial ratios help to outline a large volume of financial data into a
concise form so it is easy to interpret and conclude the performance
and position of a firm.
Accounting ratios is a useful tool for management to making decision.
By using ratio analysis, it helps management to evaluate the firm
performance such as financial health, profitability and operational
efficiency over a period of time by comparing the present ratios with
the past ratios and comparing with other companies also so as to see
where the company stands in the industry. In another way, by setting a
trend with the help of ratio, management can know whether the firm
financial position is improving, falling or constant over the years.
Through the direction of the trend of strategic ratio, it is helpful for
management in the function of planning, forecasting and controlling.
1.2 Statement of the Problem
ratio is referred to as a basic tool and a general yardstick for
evaluating organization’s performance, there are so many factors which
basically militate against the usage of financial ratio and hence reduce
its potency in the determination of an organization’s actual
performance. Some of these factors are:
i. Manipulation of accounting figures in order to suite potential investorsgiving rise to misleading financial report.
ii. Many organizations fail to appreciate the impact of
financial ratio analysis on investment decision in such organization
iii. Many organizations disclose information in the financial statements that is inadequate to support good decision making
iv. Many companies do not comply strictly with the principles that govern analysis of financial ratio
All these are factors which may mar the usage of financial ratio in
the evaluation of an organization’s performance. Having highlighted the
factors and other investors in ensuring and assuring maximum returns
from investment decision? How do management and other users go about
calculating these ratios with the aim of deriving the most suitable
answer that will enable them to make the best investment decision with
their limited resources? These are the questions this research shall
endeavour to answer.
1.3 Aim and Objectives of the Study
The purpose of the study is to assess the impact of financial ratio
on the organization performance with particular emphasis on UAC Nigeria
plc. Other objectives of the study include:
i. Examining how accounting figure are handled and
haw that affects the financial reports of the three company under
ii. Examining how accounting ratios has influenced investment decision in these organizations
iii. To ascertain the profitability trend of the
organization given its level of investment and turnover using accounting
iv. To assess the performance measurement policy of the company under review.
1.4 Relevant Research Questions
i. How is accounting figure handled and how does
that affect the financial reports of the company under review?
ii. How has financial ratio influenced investment decision in these organizations?
iii. What is the profitability trend of this
organization given their level of investment and turnover using
iv. What is the performance measurement policy of the company under review?
1.5 Statements of hypotheses
For the purpose of this study, the following hypothesis will
be tested using spearman’s rank correlation
H0: There is nosignificant relationship between accounting ratioanalysis and measurement of organization’s performance
H1: There is significant relationship between accounting ratio analysis and measurement of organization’s performance
1.6 Significance of the Study
of using the accounting ratios methods in the UAC Nigeria plc is
represented by providing the appropriate and accurate information to
know the reasons of the deviations and then to evaluate the company’s
This study gives insight into the various ways that financial ratio
analysis can help improve organizations performance and how the
financial performance of organizations in Nigeria can be properly
assessed in order to attract investors. 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 the 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 Nigeria, 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 highly restricted to the assessment the financial
performances of UAC Nigeria plc for the periods 2003, 2004,
2005, 2006, 2007, 2008, 2009, 2010, 2011 and 2012. These companies
were chosen because it is near to the researcher hence gathering of
information would be easy. The above periods were also chosen because;
the researcher wants to assess the more recent financial performance of
the company under study.
1.8 Definition of Terms
Liquidity Ratios: This is measurement of how readily a company can meet its obligations.
Profitability Ratios: This gives an indication of the earnings and
profitability potential of a company.
Asset Management Ratios: This gauge how efficiently a company can
change assets into sales.