Decision making is not the core of every
investment activity. A decision is a choice between two or more
alternatives. The implementation of meaningful decision gives way for
achievement of investment goals and objectives while implementation of
wrong decision positively give rise to investment failure.
The ultimate objectives for investment
are profit maximization and growth thus it becomes necessary that
capital decision have to be made and implemented so as to achieve the
For a meaningful decision that will be
used in these objective for an investment to be made available, analysed
and studied and through what is derived, decision is made and
implemented wither for action, execution or corrective measures where
One of the important information needed
about investment is concerned with financial aspect and the record that
contains the financial aspect of an investment is what is referred to as
analysis of financial statement referred to as analysis of financial
According to financial statement
analysis and interpretation for alert investors by C. Chinelo Ikoku,
financial statement components are as follows:
- The chairman board of directors report
- The auditor’s report
- Graphs and figures.
- Table of accounting date.
Financial analysis via ratios hence it
is sometimes referred to as ratio analysis or accounting ratios analysis
interpreting investigation into financial statement. The ratios
derived from financial statements are used in three different ways
- Structural analysis
- Time series analysis
- Gross sectional analysis.
For investment executions, decision such
as buy, certain or sell are necessary. Equally, decision for
evaluating management performance, as well as current and future level
of risk and profitability is all important. Meaningful decision in all
the above mentioned areas will help for a good choice among available
portfolio of assets, dividend yield, total return as well as liquidity.
In this project study, concentration will be based on such financial ratio as:
- Profitability ratio
- Liquidity ratio
- Asset management ratio
- Market value ratio
1.1 STATEMENT OF THE RESEARCH PROBLEMS
investors are know to have entered into investment ventures without
property understanding such investment opportunity, thus making and
implementing wrong decision thereby ending up in folding up when the
going proved impossible. At times when the investment activities go on,
the aim for such action not realized.
Investment failures have
equally been identified with poor management, which arises as a result
of mobility of the management of such investment firms in making
meaningful decisions required for such investment opportunity.
Many investment are carried
out without emphasis laid on those investments that would generate
profitable returns in the future, the risk involved and the benefits to
be derived if embarked upon given the scare financial resources and the
resultant effect of failure. Such set back is the life of an investor
and in the case of investment firms, liquidation.
All the above stated problem
arises as a result of wrong decision making hence, this study will
therefore, identify the means through which meaningful decision can be
derived as to enhances the changes available for investment entities or
firms through analyzing information concerning such investment
1.2 PURPOSE OF THE STUDY
Investment failures have been identified
with poor managerial and investors decision approach, which arises as a
result of poor knowledge about an investment as to help in making
meaningful decisions for investment purpose and realization of goals.
This study intends to find out the following:
- How analysis of financial statement can help in making meaningful
decision, which will enhance investment structure and goal realization
- To ascertain the different decision bench marks employed by investment
- To demonstrate the interpretation of computed ratios.
Investment failure has been so
pronounced in the recent times. In the process, capitals are lost and
set backs experienced as a result of low return to stockholders and in
some cases complete liquidation. In this study therefore, the
researcher intends to find out how analysis of financial statements will
aid in making meaningful decision that will enhance investment chances
in realizing objectives to convert loss of capita and set backs
experiences or total liquidation.
1.3 RESEARCH QUESTION
The dimension that this research will
cover will be based on the following questions, which will help in
increasing an insight into the problems under investigation.
- To investment failure arise from implementing wrong decision?
- Does poor decision implementation cripple investment grail actualization?
- Are decision derived from analyzing financial statements?
- Does poor management arise from inability to evaluate or analyzed investment opportunities?
- To what extent are decisions derived from financial statement relied?
- To what extent is decision derived from analysis of financial statement used?
- How does investment firms make their decision?
- Do investment proposals require analysis or evaluation to be made on them?
1.4 STATEMENT OF HYPOTHESIS
1. HO: Using analysis of
statement while making investment decision will not very significantly
with the probability of the investment.
Hi: Using analysis of statement
white making investment decision will vary significantly with the
probability of the investment
2. HO: There is no significant relationship between investment decision and analysis of financial statements.
Hi: There is significant relationship between investment decision and analysis of financial statements.
3. HO: There is no significant relationship between investment decision and investment profitability.
Hi: There is significant relationship between investment decision and investment profitability
1.5 SIGNIFICANCE OF THE STUDY
It is hope of the researcher that the
findings and recommendations of this project work will be of great
importance to many interested persons. The significance of the study
will include the following.
- It will serve useful purpose to investors, the importance of making
meaningful investment decisions through analyzing financial statement of
an investment at any point in time,.
- To create in investors the awareness of the risk associated with a
particular investment as it can be revealed through analysis of
financial statements of such investment thus celling for proper decision
- Expose investors to the benefit derived in making meaningful
decision among alternatives that will be of goal outcome for an
- To expose investors to awareness on how the set backs and bitter
experienced witnessed from investment failure can be totally eradicated
through implementation of meaningful decision
1.6 SCOPE AND LIMITATION OF STUDY
This research work will be conducted
among selected investment firms in Enugu state. The localization of the
study is informed by the financial constraints on the part of the
researcher. The study has also been subjected to time constants
because it was carried out single handedly by the researcher.
Bureaucracy as practiced by the firms and dearth of relevant information
constituted impediment and limitations in themselves.
1.7 OPERATIONAL DEFINITION OF TERMS
To enhance a proper understanding of this research work, the following technical terms have been defined.
There is a deliberate though process
that leads to the taking of action. Decision making is used essential
in execution of both long and short term plans. Relevant information
for decision making must be expressed in forms of financial or
quantitative analysis in order that a rational choice can be made.
This is records that contains financial reports of an investment or business entity.
It is ratio
that can be calculated form an investment financial statements which
enhance our understanding financial statements which enhance our
understanding of investment financial performance and position
the ability of the firm to meet its obligations as they become due. The
liquidity ratios by establishing a relationship between cash and other
current assets to current obligations provide a quick measure of
liquidity. An excess liquidity will result in bad credit raking and
loss of confidence by creditors.
computed by dividing current assets by current liabilities current
assets include cash marketable securities, accounts receivables and
inventories. Current liability consist of accounts payable, notes
payable, accrued income and taxes short-term loans etc.
Leverage ratios measure the
funds supplied by the owners of the business as compared to the finance
provided by the firms creditors. As a general rule, there should be an
appropriated mix of debt and equity in financing the firm’s assets.
From the creditor’s point of view, a higher incidence of owner financing
is desirable because investors look to firms equity stock for security
in the event of liquidation. On the part of the owners of the firm, a
higher incidence of creditor financing is desirable. If borrowed funds
can be used by the business to generate earnings in excess of interest
charges on those funds, then borrowing has benefited the owners.
Leverage is approached in two
ways. One approach examines balance sheet ratios and determines the
extent to which borrowed funds have been used to finance the firm. The
other measures the risk of debt by income statement ratios designed to
determine the number of time fixed charges are covered by operating
profits. Firms with low leverage ratios have less risk of loss when the
economy is in a down turn, but they have lower expected returns when
the economy booms. Conversely, firms with high leverage ratios run the
risk of large losses but also have a chance gaining high profit.
TOTLA DEBT TO TOTAL EQUITY
This is a
measure of the relative claims of creditors and owners against the firms
assets. The ratio considers both current liabilities and non current
liabilities in the numerator. The stake of the owners in the business
vis-à-vis that of creditors must take control of the business with high
sense of responsibility.
TIME INTEREST EARNED RATIO
the degree to which earnings can decline without resultant financial
problem to the firm because of its inability to meet interest cost.
are employed to evaluate the efficiency with which the firm manages and
utilizes its assts. The activity ratios involve a relationship between
sales and various assets. A proper balance between sales and assets
generally reflects that assets are managed very efficiently.
TOTAL ASSETS TURNOVER
the capacity with which total assets are utilized to generate the firms
turnover. It is calculated by dividing sales by total assets.
CAPITAL EMPLOYED TURNOVER
The capital employed is the permanent or long run funds entrusted to the firm by the creditors and owners.
examine how effectively the firm is being managed. The managers,
creditors, shareholders, as well as the employees of the firm are
interested in the profits of the firm. It assess the economic condition
of an investment. It shows profitability in relation to investment .
they indicate efficiency of operation.
GROSS PROFIT MARGIN
is used to evaluate the spread between sales revenue and the cost of
goods sold. It is computed by diving gross profit by turnover.
NET PROFIT MARGIN
measures the management efficiency in the administration of the
business. It is used to determines the return on per Naira of sales.
RETURN ON CAPITAL EMPLOYED
It measures how well the management has utilized funds supplied by the shareholders and creditors.
RETURNS ON TOTAL ASSETS:
It measures the rate of efficiency with which the firm has employed its assets for purposes of making profit.
EARNING PAY-OUT RATIO
This is the ratio that represents the position of investment earnings that is paid as dividend to shareholders.
This is measurement of return on investment.
These are firms associated with commitment of resource for gains actualization
RETURN ON INVESTMENT
This measures the efficiency with which an investment has utilize the total fund available in generating profit.
capital refers to a firm’s investment in short-term assets-cash,
marketable securities, trade debtors and stock, less current liabilities
used to finance the current assets. Working capital management
therefore means the planning and controlling of both current assets and
current liabilities. It involves the administration of cash,
receivables, inventories marketable securities and the current