ABSTRACTS
The topic is “financial ratios as a management strength in an organization (a case study of all insurance firms in Nigeria). Financial ratios are used almost universally by companies of all size to provide numerical information on the profitability, health and direction of the business. Financial ratios provide useful analysis and can help drive management towards making better decisions if they are interpreted correctly. A ratio analysis is a quantitative analysis of information contained in a company’s financial statements. Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency. Financial ratios are measureable values that present how a company is achieving its key business objectives. The study applied several theories such as the framework on financial ratio, performances and evaluation; ratio analysis. The study used secondary data analysis make use of both primary source of data in the write up refers to data and information. Data was sourced from the audited financial statement of Aiico Insurance Plc, on the financial ratios. This study applied DuPont Equation on the DuPont methods for assessing a company’s return on equity (ROE). The management are advice to make use of financial ratio in analyzing financial positions of the firms, they should be concern about activities that will improve the company’s trading performance. The management are advice to make use of financial positions of the firms, they should be concern about activities that will improve the company’s trading performance. Based on the findings of the study, it can be concluded, the relevant accounting standards was stated on its objective of finance which stipulated that “financial report should provide information useful to present to the shareholders and potential investors, creditors and other users in making rational investment, credit and economic decisions.”
CHAPTER ONE
INTRODUCTION
· Background of the Study
This is the expression of one figure in terms of another figure in order to find out the relationship between them.
Financial ratio or financial information to a unprofessional can be said to mean the information that is given or revealed by accountants.
Accounting information, according to statement of accounting standards No. 2 which are the means of communicating to interested parties information on the resources, obligations, and performances of the reporting entity or enterprises.
The meaningful information can be gathered collated and presented in different forms. The financial position of a company is very important and essential. It states the position of a company as at a particular data. The reason is that the firm has to know they are making expected returns and maintaining a sustainable growth on shareholder’s investments. Accounting information will assist all users to assess the financial liquidity, profitability and viability of a company.
This is the reason why they need to be disclosed to the users. Financial ratios are one of the most common tools of managerial decision making. A ratio is a comparison of one number to another mathematically, a simple division problem.
Financial ratio involves the comparison of various figures from the financial statements in order to gain information about a company’s performance. It is the interpretation, rather than the calculation that make financial ratios a useful tool for business managers. Ratios may serve as indicators, clues, or red flags regarding noteworthy relationship between variables used to measure the firm’s performance in term of profitability, asset utilization, liquidity, leverage, or market valuation
· HISTORICAL BACKGROUND OF INSURANCE FIRMS IN NIGERIA AS A WHOLE.
It is important to know industry of insurance in Nigeria. The birth of modern insurance in Nigeria is closely associated with the arrival of British trading companies. These companies facilitated inter-regional trade in the country. These foreign companies, therefore, needed to deal with some of their risks at a local level. This changed the shaped of the insurance sector in Nigeria.
These trading companies were given insurance agency licenses by their foreign authorities from abroad. The licenses allowed the firms to facilities claims supervision and issue.
The first comparison indigenous to Nigeria was African Insurance Company limited. This was established in 1958 on October 1, 1960. The country gained independence from the British at the time of independence there were twenty five insurance companies in Nigeria only four of these companies were directly own by Nigerian. The insurance industry in Nigeria has been steadily growing ever since.
The development of insurance took place long before Nigeria became the independent country. Since that period, Nigeria has overcome a long path filled with different charge. As years went by the evolution of insurance became more invisible, though in comparison with other world countries insurance in Nigeria is developed quite poorly. The reason for this come not only from insurance services but also from economic sector.
Evolution of Insurance Beginning: The pre-requisites of the current situation with insurance were born in the colonial period. Until the1960s, the leading role in the Nigerian insurance market was played by European companies. They insured goods sent to centers of the empire. After colonies gained political independent, African Branches of these companies were nationalized, the government tried to form their own insurance markets to avoid currency outflows abroadand they manage to do this with the support of the UN.
· STATEMENT OF THE PROBLEM
Financial ratios are used almost universally by companies of all sizes to provide numerical information on the profitability, health and direction of the business. Financial ratios provide useful analysis and can help drive management toward making better decisions if they are interpreted correctly. However, there are some draw backs to relying on these metrics.
Lack of comparability between companies
Financial ratios are a useful tool to track charges in business overtime. For example, if a liquidity ratio is lower this year than last, there may be a problem that needs further investigation.
No indication of cause of changes
Ratios tell a business owner what happened but they do not tell him why it happened. Business owners must dig deeper into the numbers to determine why ratios are charging from period to period.
Ratios based on book value
This is one of the largest problems with relying on financial ratio. Because the financial statements are prepared based on book value (largely historical costs) they do not reflect current reality in the business.
No measurement of management quality
One of the key determines of business success is the quality and experience of the management team.
· RESEARCH OBJECTIVES
The objectives of a study simply means the reason why the study or the research is being carried out. The objectives of this study are:
1. To investigate the extent to which financial ratios are used to determine the financial position of a firm
2. To determines if the proper accounting policies and concepts are followed.
3. To highlight the important of the financial ratio to users of accounting information.
4. Financial ratio are important in analyzingthe performance of a firm.
5. Financial ratios are very important in decision making at the top management level.
6. Ratio analysis are based on the financial analysis for measuring profitability and liquidity in a company.
· RESEARCH QUESTIONS
Financial ratios are important tool to help understand a firm’s financial condition. Ratios can be derived from published financial statements and used to compare to the performance within a company over time. Based on the research objectives which are stated above the research questions are as follows:
1. To what extent do financial ratios determine the financial position of a firm.
2. To what extent accounting policies and concept are followed.
3. What is the importance of the financial ratio to users of accounting information.
4. Does your company use financial ratios to analyze its performance?
5. To what extent do financial ratio is important in decision making at the top management level.
6. Ratio analysis are based on the financial analysis or measuring profitability, viability and liquidity in a company.