Impact Of Ratio Analysis As A Tools For Investment Decision

Impact Of Ratio Analysis As A Tools For Investment Decision

First Part

1.1 Introduction

The term “Ratio Analysis” refers to the examination of financial statements to evaluate the performance of a company or group of companies.

The “Investment Decision” refers to the decision to invest funds in a proposal whose benefits will be realized in the future.

This work focuses primarily on the combination of the two terms described above or the relationship between them. That is the impact ratio analysis has on investment decisions as a tool. The three essential financial statements are the income statement, balance sheet, and statement of variations in financial position. As part of financial statement analysis, the analysis of these statements must be combined with the preparation and analysis of related financial statements.

The financial administration of a company utilizes specific analytic tools to make decisions that are consistent with the company’s mission. The company itself, as well as capital providers, creditors, and investors, conduct financial analysis. The purpose of the form is not only internal control, but also a greater comprehension of what capital providers desire in terms of financial condition and performance. To evaluate, the financial analyst requires a set of yardsticks commonly employed in ratio or index calculations relating two sets of financial data. For example, the accounting ratio known as gross profit percent or gross margin expresses the relationship between gross profit and sales.

GROSS PROFIT% = Cross profit multiplied by 100 = x%

Sales 1

1.2 History Of The Organization

On 4 December 1948, the company was incorporated in Nigeria under the name P.B. Nicholas and Company Limited with an authorized share capital of 40,000 divided into 40,000 ordinary shares of 1. The company’s name was modified in 1953 to Alagbon Industries Limited and again in 1960 to Associated Industries Limited. On 19 July 1972, the company became a public limited liability company and its shares were subdivided into ordinary shares worth 50 kobo each. In the same year, its shares were listed on the Exchange. The company’s current name, Paterson Zochonic Industries Plc, was adopted on November 22, 1990.

The group’s principal activities consist of the production and distribution of a vast array of consumer goods and home appliances. Their products consist of detergents, soaps, pharmaceuticals, cosmetics, candies, refrigerators, freezers, air conditioners, plastic containers, and components. The activities that account for 85 to 90 percent of Merchandising.

1.3 Description Of The Problems

Many businesses throughout the world have encountered unit health issues as a result of investment decisions. Nigeria’s situation has become more dire in recent years due to the following cause.

i. The country is experiencing a general economic downturn.

ii. Anticipated and widespread political instability.

The establishment of a second-tier foreign exchange market.

iv. Ratios derived from financial statements can be based on historical data, which will require additional analysis during periods of escalating prices.

Too much weight can be placed on a single ratio when ratios are interdependent and must be regarded as such.

vi. Inadequate professional knowledge to interpret the calculated ratio.

Seasonal business activities will have an impact on ratio analysis.

Nevertheless, the fundamental solution to this problem (investment decision) is to make the right decision at the right moment; through the proper application of ratio analysis in the interpretation of financial statements, investment decisions will be simplified.

The analysis and interpretation of various ratios should compel experienced, skilled analysts to gain a deeper comprehension of the financial condition and performance of the organization than would be possible through the analysis of financial data alone.

1.4 Purpose Of The Study

i. To highlight the difficulties encountered when using ratio analysis to make investment decisions in the actual world of business.

ii. To enable users of financial business statements to comprehend the methods for analyzing final account

iii. analyzing and interpreting the company’s trends and ratios.

iv. to propose alternative investments in practical terms.

v. To determine companies contribution to social development

1.5 Scope And Limitation Of Study

The scope of the study will encompass the applications of ratio analysis within the company’s accounting system.

As a case study, PZ Nigeria LTD will be extensively examined. The scope of the study shall be restricted to financial accounting. There are additional accounting disciplines, including management accounting, financial accounting, and auditing.

However, the concentration of this study will be on financial accounting, as this is the most significant area for ratio analysis. The following factors contribute to the limitations of ratio analyses:

i. The problem with currency and sufficiency. Balance sheet items are historical and have a limited functional life.

Problems with determining appropriate and permissible comparison bases.

iii. price level fluctuations render ratio interpretation invalid.

The ratio calculated suffers a setback due to short alterations.

Due to differences in their policies, operations, and circumstances, the comparisons between the ratios of various businesses are inaccurate.

1.6 Importance of the Research

i. It is used to determine a company’s financial strength and weaknesses, enabling for any necessary corrective action.

ii. Ratio analysis is used to interpret the company’s future function prospects.

iii. It can be used to ascertain the company’s liquidity position.

iv. It is used to determine the effectiveness of management in utilizing available company resources.

v. Ratio analysis is used to determine the availability and sufficiency of a company’s capital.

vi. It is used to make positive comparisons between the company’s past and present operational situations and to make clear projections for the future.

It will assist potential investors in making investment decisions. This will accurately assess the company’s leveraging solvency and growth potential.

viii. It will assist management in evaluating performance by comparing various ratios to the company’s previous accounting results (trend analysis).

1.7 Definition Of Major Terms

The following are the primary applications of the term:

i. RATIO ANALYSIS: The term ratio analysis refers to the analysis of a company’s or group of companies’ financial data in order to evaluate their performance.

ii. INVESTMENT DECISION: The term “investment” refers to the allocation of funds to investment proposals whose benefits will accrue in the future.

iii. FINANCIAL ANALYSIS: Financial analysis is the evaluation and assessment of a company’s financial and operational strengths and weaknesses in order to determine its efficiency, portability, liquidity, and solvency.