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ANALYSIS OF FINANCIAL STATEMENTS AS AN AID TO MEANINGFUL
INVEST DECISION MAKING
ANALYSIS OF FINANICAL STATEMENTS AS AN AID TO MEANINGFUL
INVEST DECISION MAKING (A CASE STUDY OF INVESTMENT FIRMS IN ENUGU STATE)
1.0
INTRODUCTION
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 aforementioned objectives.
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 necessary.
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 statement analysis.
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 namely:
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
Many 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 opportunities.
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 making
Expose investors to the benefit derived in making meaningful
decision among alternatives that will be of goal outcome for an investment
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.
DECISION MAKING
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.
FINANCIAL STATEMENT
This is records that contains financial reports of an
investment or business entity.
FINANCIAL RATIO:
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
LIQUIDITY RATIOS:
They measure 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.
CURRENT RATIO
This is 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 RATIONS:
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
It measures the degree
to which earnings can decline without resultant financial problem to the firm
because of its inability to meet interest cost.
ACTIVITY RATIOS:
These ratios 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
It measures 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.
PROFITABILITY RATIO
These ratios 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
This 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
The ratio 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.
EARNING YIELD
This is measurement of return on investment.
INVESTMENT FIRMS
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.
WORKING CAPITAL
Working 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 liabilities.
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