ABSTRACT
Risks and uncertainties are factors, which a business must face so long as it remains a going concern. Thus to avoid the effect of such risks and uncertainties, management and other potential businessmen are advised to adopt the tool of financial ratios.
The financial ratios will expose the position of the business in terms of performance and efficiency of operations. They show whether the management are efficient or inefficient in utilization of resources such as capital, assets labor etc.
This project work is aimed at highlighting usefulness of financial ratios as a tool of evaluating the performance of companies for investment decision.
Chapter one (the introduction) will explain the meaning of financial ratios, it will go further to state the purpose of the study, it significance, scope as well as definition of terms with respect of financial analysis. Chapter two will deal with the literature review. Then the study of background of topic will be equally highlighted. Explanation of selected financial ratios will also be shown.
Coming to chapter three, the techniques of collection of data and data analytical tool to be used will be described here. The techniques for collection of data will include the questionnaire sources. The data analytical tools to be used as percentage size analysis and chi-square. Chapter four shows the analysis of the data collected.
Finally, in chapter five, the findings be made will be stated, followed by recommendation to ensure effective and efficient use of financial ratios by users for investment decisions. Finally the conclusion will inform readers or users that usefulness or benefits of financial ratios in evaluating performance of companies for investment decision cannot be over emphasized and that if neglected, the shareholders or investors will not know their position or fate in companies.
CHAPTER ONE
1.1 INTRODUCTION
Financial ratios are tools used to analyze financial conditions and performance. Financial analysis means different things to different people. Trade creditors are primarily interested in the liquidity of the firm being analyzed. Their claims are short term and the ability of the firm to pay these can best be judged by an analysis of its liquidity. On the other hands, the claims of bondholders are long term. They are interested in the cash flow of the firm to service debts over a long period of time. The bondholders may evaluate this by analyzing the capital structures of the firm, the major sources and users of fund, the firms profitability. Finally, an investor in a company’s common stock is concerned principally with present and expected future earning as well as the stability of these earning about a trend. As a result the investor usually concentrates on analyzing the profitability of the firm (financial ratios) the point of view of the analyst may be either external or internal. For external, it involves suppliers of capital while that of internal, the firm needs to undertake financial analysis in order to plan and control effectively. To plan for future, the financial manager must assess the firm financial position and evaluate opportunities in relation to their effects on this position.
With internal control, the financial managers is particularly concern with return on investment in the various assets of the company and in the efficiency of asset management.
Financial analysis involves the use of financial statement. These statement attempt to several things. They portray the assets and liabilities of a business firm at a moment in time usually at the end of a year.They portray an income statement which involves the revenue, expenses, taxes and profit of the firm at a particular period of time usually one year. While balance sheet represent a snapshot of the firm’s statement of assets and liabilities at a moment in time. The income statement depict its profitability over time.