RATIO ANALYSIS AS A TOOL FOR PERFORMANCE EVALUATION
Ratio has been most important tools for the effective development
of manufacturing companies and industries, the major uses of ratio is
to access the profitability, gearing, liquidity and asset turnover of
the company. The introduction of ratio analysis in manufacturing company
has brought about a turn around in many industry and companies.
The important of ratio analysis in the running of any manufacturing
cannot be over emphasizes, it is this significant role that led to the
believe. That ratio is the life blood of every manufacturing companies
1.1 BACKGROUND TO THE STUDY
The primary objectives of a company being in existence is to make
profit. Although this is not only objective. It nevertheless remains an
extremely important yardstick used in determining the long run survival
of most companies.
Therefore it is necessary to be also to access whether or not a
company has performed well over a period of time. This and loss account,
but compared with the amount of money invested in the business? are
they equivalent to the level earned by major competitors? We need to
know whether or not the company is in a healthy short term financial
position for long-term expansion. We need to know the answer to these
and many other questions. However, it is difficult to access how well a
firm or company is doing by merely examining the Naira amount reported
for individual items in the financial statement.
“Financial statements, in their raw forms hold little or no meaning
to the user. The figures contained there is have to be converted to
ratios in order to ensure easy analysis, ratios are not the end but a
means to an end. They ensures analyst ask the right question” (Adeyeye
and fajembola 1998 page 21).
According to Ajayi (1998 page 42), financial analysis is the process
of identifying the financial strength and weaknesses of a firm by
property establishing relationships between items of the balance sheet
and the profit and loss account.
Olowe (1997 pg 239) says financial ration analysis is the
relationship between financial data in the financial statement to aid
the financial condition and performance of a firm. The analysis will
give an analyst a better insight into the understanding of the financial
statements that would be obtained by examining the financial data
Ratio analysis is a powerful tool for financial analysis a ratio is
defined by Pandey (1999 pg 109) as the indicated quotient to two
mathematical expressions and also as “the relationship between two or
Because of its flexibility, financial ratio can be used to analyse
all forms of business ownership irrespective of their sizes and
figures; the analysis can be carried into all aspects of the
operations of manufacturing industries.
In view of thus this research work examined ratio analysis as an
effective tools for performance evaluation in a manufacturing
1.2 STATEMENT OF THE PROBLEM
The financial state and the results of operations of business
enterprises are of interest to various groups including the management,
shareholders, creditors. The government, employees customers, financial
analysts and advisers, potential shareholders, competitors etc. the
principal statements together with supplementary statement present
much of basic information needed to make sound economic decisions
regarding the business enterprise.
Most of the items in the financial statement when considered
individually, do not give any serious meaning so there is the need
of finding an effective tool of evaluating the performance of the
Hence, the adoption of ratio analysis as a tool for performance
evaluation and the research is conducted on the Glaxosmithkline consumer
Plc to ascertain whether truly or not analysis is an effective tool
for evaluating the performance of manufacturing industries.
1.3 OBJECTIVE OF THE STUDY
The main objective of carrying out this study is to evaluate the
financial statement and performance of Glaxosmithkline consumer Plc for
the last five years so as to reveal it financial strength and
weaknesses and the causes, which have contributed thereto. The specific
objectives are to appraise the company’s capital structure and its
a. To evaluate ratio analysis as a tool for measuring the performance of manufacturing industries.
b. To help users of financial statement know the extent to which ratio analysis evaluates performance in an organization
c. To analysis the company solvency, in relating to current
assets and current liabilities and the breakdown of these measures to
show the effect of cash flow, inventory change and movements in debtors
d. To assess the company in terms of value to investors ratios
dealing with this area includes PE (Price/earnings) ratio dividend
yield and other such investment criteria.
e. And lastly, to open another angle to ratio analysis an
which future researchers can explore and hence, further an area not
covered by the present research work.
1.4 RESEARCH HYPOTHESIS
An hypothesis is a preparation or principles which assumed perhaps
without belief in other to draw its logical consequences and also by
method to test its accord with fact, which are know or may be
An hypothesis is a conjectural statement of the relationship between
two or more variables. Hypothesis are always in declarative sentence.
Form and they relate either generally or specifically variable to
A good accounting ratios gives a proper accounting record and
effective informal control. In view of this study, the researcher
formulate Null hypothesis (Ho) and Alternate hypothesis (Hi) to test the
Null hypothesis (Ho): Ratio analysis are not significant in performance evaluation.
Alternative hypothesis (HI): Ratio analysis are significant in performance evaluation.
1.5 SIGNIFICANCE OF THE STUDY
In this present time when companies are going bankrupt and getting
liquidated, this research work would provide a substantial information
to manufacturing industries on how ratio analysis helps in measuring
and evaluating their performance which the study is also justified in
the following ways,
It would enlighten the researcher’s audience on the usage of financial ratio in assessing a company’s performance.
It is equally expected that prospective investors with little or
no accounting knowledge would be able to critically evaluate the
financial statement of organizations, which are of interest to them
when carrying out investment decisions.
Finally, future researchers in similar field would find this research work useful, as it could be a reference for their study.
1.6 SCOPE OF THE STUDY
The study is basically on the impact of ratio analysis as a tool for evaluating the performance of manufacturing industries.
It covers the examination of ratio analysis as a useful tool for
measuring the performance of Glaxersmithkline consumer Plc and the study
also, covers the examination of its annual report and account for a
period of five (5) successive financial years (2004-2008).
1.7 HISTORICAL BACKGROUND OF THE CASE STUDY
Glaxosmithkline consumer Nigeria Plc was incorporated in 1971 in the
united kingdom with the shares of the company held 46.4 percent and
53.6% by Nigerian shareholders. Glaxosmithkline is formed through the
merger of Glaxo welcome and Smithkline Beecham (GSK).
In 2001 Glaxosmithkline moves to its new U.K. headquarters in
Brentford, west London, (NSK Hore consists of an internal fully –glazed
street; the building was designed with input from employees,
Glaxosmithkline re-organizes its research and development effort into
centres of excellence for drugs development (CEDDs) small business unit
that emphasize flexibility, innovation and therapeutic focus
Glaxosmithkline launches the African malaria partnership to help combat a
disease that kills more than one (1) million people every year.
In 2002 Glaxosmithkline makes the 19th anniversary of AET, the first
medicine used to treat Hiv/Aids. By the end of 2002, Glaxosmithkline had
secured 120 arrangement to supply preferentially priced Hiv/Aids
medicines to 50 of the world’s poorest countries.
In 2003 and 2004, ten (10) million people in sri laika receives free
doses of Glaxosmithkline donated albendaole to help prevent the
transmission of lymphatic filariasis. Glaxosmithkline also launches its
clinical trail register, an internet site contemning clinical trail
data that anyone can access Glaxosmithkline is the first pharmaceutical
company to offer this level of transparency for its clinical trial
In 2006 Glaxosmithkline produce over 10 million packs of anti-flu
treatment Relenza in one year to boost its consumer health care
portfolio, Glaxosmithkline acquire CNS Ino producers of the breathe
Right nasal dilator strips and fiber chance dietary fiber supplements by
the end of 2006, 600 million treatment for lymphatic filariasisi had
been donated as part of the company commitment to eradicate award for
effort to end lymphatic filariasis.
In 2007 and 2008, it was a busy year for acquisition,
Glaxosmithkline acquires domaritis, a leader in developing anticbody
therapies, paresis pharmaceuticals a biopharmaceuticals coming and
reliant pharmaceuticals, a producer of cardiovascular medicines.
Glaxosmithkline submission of combination vaccine Glaxorix to the
European medicines Agency (EMEA) with the intention of providing the
vaccine to Africawith no commercial reward. Andrewe witty named CEO
designate to replace IP Gariner in may 2008.
In 2009, weight loss medicine alli launches I n Europe. As influenza
A (H1N1) spreads across the world. Glaxosmithkline commits to tackling
the pandemic with its anti-retroviral and vaccine products.
Glaxosmithkline and Pfizer viiv healthcare, a new company focused on
deliverying advances in treatment and care for Hiv communities. it also
agrees to lauch locozade in China. Glaxosmithkline HiNi pandemrik
vaccine receives European commission approval, as panel of its
commitment to greater transparency, Glaxosmithkline publish speaking and
consulting fees paid to U.S Physicians.
And finally in 2010 Glaxosmithkline contribute $1.4 million of
medicines to support victims of the Haiti Earthquake, Glaxosmithkline
announces open innovation strategy to help deliver new and better
medicines for people living in the world’s poorest countries new
collaborations will share intellectual property for neglected
tropical diseases such as malaria, Glaxosmithkline joins global vaccine
alliance to help prevent millions of children from contracting
pneumacoccal disease in the world’s poorest countries.
The company is engaged in the manufacturing, marketing and
distribution of a wide range of health care brands, well established
in Nigeria. these include the consumer healthcare brands such as
panadol, Andrew liver salts, macleans, Aquafresh, Phensic, lucozade,
Ribena and a range of internationally acclaimed pharmaceutically,
including Amoxil and Augmentin (antibiotics) zental (the
anthemintic),Halfan (Antifmalaria) and vaccines etc.
1.8 DEFINITION OF KEY TERMS
RATIO ANALYSIS: Ratio analysis, simply put the
analysis of accounting ratios. An accounting ratio to Igben (1999), is
“a proportional or friction or percentage expressing the relationship
between one item in asset of financial statements.” Ratio analysis
involves the use of ratios as a “bench mark for evaluating the
financial position and performance of a firm” (Pandey, 1999).
PERFORMANCE EVALUATION: Performance can be defined
as “the ability of a person of machine to do something well” (Longman
Dictionary of contemporary English 2nd Edition, 1987). Performance
evaluation, therefore involve efforts or activities aimed at assessing
the ability of a company to manage investors funds well, so that an
optimum return can be earned on the capital invested in them.
ANALYST: “It is an executive whose mental orientation is driven by facts analysis and logic” (Koch, 1991, page 150).
ANALYTICAL TOOLS: “It is an instrument for making rational decision toward achieving the objectives of the firm” (Olowe 1997 pg 239).
FINANCIAL STATEMENT: “These include a large volume of quantitative data supplemented by descriptive notes”. (Ekwere, 1997 page 191).
DATA: A much abused plural noun (incorrectly used by
most managers as though, it were singular) indicating the objective
numerical and factual basis of analysis and conclusions” (Koch, 1994,