Analysis Of Financial Ratios As An Aid To Economic Analysis
(A Case Study Of Union Bank Plc Enugu)
Financial ratios play a crucial role in aiding economic analysis by providing a quantitative framework to evaluate the financial health and performance of a company. These ratios, derived from various financial statements, offer valuable insights into a company’s liquidity, profitability, solvency, and efficiency. For instance, liquidity ratios such as the current ratio help assess a firm’s ability to meet short-term obligations, while profitability ratios like return on equity indicate the company’s efficiency in generating profits from shareholders’ equity. Additionally, solvency ratios like the debt-to-equity ratio reveal the extent of a company’s financial leverage. By systematically analyzing these ratios, analysts and investors can make informed decisions, identify potential risks, and gain a comprehensive understanding of the economic viability and stability of a business entity.
Title page I
Certification page ii
Dedication iii
Acknowledgement iv
Table of content v
CHAPTER ONE
Introduction
Statement of problem
Objections of study
Research questions
Research hypothesis
Significance of study
Limitation or scope of study
Definition of terms.
CHAPTER TWO
Literature review
A brief overview of Ratio Analysis
Financial analysis – definition
Lending approval
Basic types of financial Ratio
Illustration and interpretation
Significance of Ratios analysis
Limitation of financial Ratios
CHAPTER THREE
Research methodology
Primary data
Secondary data
Sampling method
Methods of data analysis
CHAPTER FOUR
Presentation and analysis of data
Analysis of questionnaire
Analysis of interview
CHAPTER FIVE
Findings, conclusion and recommendations
Findings
Conclusion
Recommendations
Bibliography
Appendix
1.1 INTRODUCTION
Management should be particularly interested in knowing the financial strengths of the firm to make their best use and to be able to spot out the financial weakness of the firm to take suitable corrective actions. Thus, Economic analysis is the starting point for making plans, before using any sophisticated forecasting and budgeting procedures.
The strength and weakness of the firm need to be understood, so that the firm will be at equilibrium through the use of the strengths. To proper advantage and taking corrective actions against any weakness observed or reigned.
Although, emphasis is focused on outsider users such as creditors and owners, management is aware that their performance will be received by these external parties and for other reasons. For example the basic financial statements are used to assess the effectiveness of management in planning and controlling operations as well as for decision-making.
Management also recognizes that the evaluation of past operation as revealed by the analysis of the basic statements, represent a good starting point in future operations and serves as an important means of assessing past performance, and in forecasting and planning future performance.
Published financial statements are properly oriented towards the long – term earning power. Short-term creditors such as major suppliers or banks are usually more interested in the short-term ability of corporations to satisfy its obligations as they fall due.
As regards to union Banks, they use mostly financial ratios to obtain clue as to future performance.
This project has been embarked on mainly to give a general idea on how to make use of financial ratios aids in economic analysis. It also hopes to point out certain deficiencies associated with it and the view pints of different people working with union bank of Nigeria PLC Enugu.
In so doing, this project has been divided into different chapters, each discussing vital point or aspects.
The first chapter centers mainly on the purpose of the study, its objectives, significance and limitations associated with it. It will help to highlight problems relating to the ratios and it’s use.
The next chapter is just a simple discussion on the financial ratios. It is the literature review of this project. It tells us what different authors have said on in relation to this topic and also their points of view on the topic.
Chapter three is a belief narration on how the research of this project has been carried out, the difficulties encountered and the type of facts and sampling, I here based this project on.
The last two chapters on the other hand is pre – detailed analyzed here are datas gotten from union bank of Nigeria PLC, Enugu.
From this, I was able to draw some conclusion and deduced facts which have all been summarize in the last chapter.
Various means have embarked on to make this project possible.
1.2 STATEMENT OF PROBLEM.
The importance of financial ratios can never be over – emphasized. An efficient use of financial ratios goes a long way in carrying out this function. This fact not withstanding, I find out a lot of people in the banking sector are not even aware of financial ratios. Its functions and how it can aid the analysis and decision of the economy.
In an under – developed economy like ours, the need for this ratios is paramount if the economy is expected to be improved upon.
Another problem associate with the use of ratios is that ratios do not have much use if they are not analyzed over years. The ratios at a moment may suffer from temporary changes. This problem can be resolved by analyzing the trend of ratios over years. This is a major problem or set back in the economy. It is obvious that utilization of the financial rations is at stake and if nothing is done now. It could gradually be eroded.
1.3 OBJECTIVE OF STUDY
The objectives of this project is to present a through study of the financial ratios and to throw more light on its importance in the business world.
Also to show how financial ratios and statement guide the long term investor by providing them with long term earning power of the firm.
Again to show how creditors to form depends on financial ratios to know the liquidity margin of the firm.
1.4 RESEARCH QUESTIONS
This question will act as a guide for data collection.
Can financial ratios be used to analyze the economy?
How often do individual and firms use ratios as guide to economic decisions?
What are the significance of financial ratios
What are the limitations of financial ratios
What are the solutions to these limitation.
1.5 RESEARCH HYPOTHESIS
This project will produce to test the following hypothesis.
MAIN HYPOTHESIS
Financial ratios are not widely used as guide to investment decision due to ignorance especially to individuals.
SUB HYPOTHESIS
1. Poor knowledge of application of ratios by bank staff.
2. Confidence in the use of ratios in future.
1.6 SIGNIFICANCE OF THE STUDY
This study is useful to bankers and other firms in decision-making. It also helps them take corrective measures where there is deficiency or weakness. Bankers use proper ratio analysis before they grant any short or long term loan.
Investors and creditors also benefit from this study since the subject matter of this study gives them the general picture of the firm. They are dealing with and also the capacity of the firm to met its obligations.
With the help of ratios we can determine:
The ability of the firm to meet its current obligations
The extent to which the firm has used its long term solvency by borrowing funds.
The efficiency with which the firm utilizes its various assets in generating sales revenue and
The overall operating efficiency and performance of the firm.
1.7 LIMITATIONS OR SCOPE OF STUDY
This project centers on financial ratios. A very through research on this study is not very possible in that interviews and questionnaires have to be limited since only little sector of the population utilize the ratio.
Time factor is also another notable factor. Nobody seems to have time to even fill use questionnaire due to pressing engagement. Also, combining this project with my other academic work has been very and at times interviews has been put off due to the work load I have and the time available to do it.
Another important factor also arises during the collection of data. You find out that people are not ready to talk on any issue in which bank is involved. They tend to fed that any information given will implicate them in some ways. So most individuals try as much as possible to give a rosy picture of the entire producers even though things do not happen that way.
1.8 DEFINITION OF TERMS
For complete understanding of this project, these terms have been defined.
Ratio – The indicated quotient two
Mathematical expression
Financial ratio – The relationship between two
Accounting figures expressed
Mathematical.
Economic analysis – identifying the economic
Strengths and weaknesses of
The Firm.
Liquidity ratios – ability to meet current obligation
Activity ratios – the firms efficiency in utilizing its
Assets.
Leverage ratio – The proportions of debt and equity
In financing the firm’s assets.
Profitability ratio – The measurement of the overall
Performance and effectiveness of
the Firm.
ABBREVIATIONS
NPAT – Net profit after tax
EPS – Earning per share
ROCK – Return on capital employed
ROA – Return on assets
NBIT – Net profit before interest and taxes.
Analysis Of Financial Ratios As An Aid To Economic Analysis:
Financial ratios are critical tools in economic analysis, providing valuable insights into a company’s financial health, performance, and overall stability. These ratios help investors, analysts, and stakeholders make informed decisions about a company’s investment potential or its ability to meet its financial obligations. Here’s an analysis of how financial ratios aid in economic analysis:
- Profitability Ratios:
- Gross Profit Margin: This ratio assesses a company’s ability to generate profits from its core operations. A higher margin indicates efficient production or pricing strategies.
- Net Profit Margin: It shows how much profit a company retains from its revenue after all expenses. A declining net profit margin might indicate operational inefficiencies or increased costs.
- Liquidity Ratios:
- Current Ratio: This ratio measures a company’s short-term liquidity and its ability to cover short-term liabilities with its current assets. A ratio above 1 indicates good liquidity.
- Quick Ratio: This is a more stringent liquidity measure, excluding inventory. It helps gauge a company’s ability to meet immediate obligations.
- Solvency Ratios:
- Debt to Equity Ratio: It shows the proportion of a company’s financing that comes from debt versus equity. A high ratio might suggest higher financial risk.
- Interest Coverage Ratio: This ratio assesses a company’s ability to meet its interest payments. A lower ratio can indicate potential debt servicing problems.
- Efficiency Ratios:
- Inventory Turnover: It measures how efficiently a company manages its inventory. A higher turnover is usually more favorable.
- Accounts Receivable Turnover: This ratio evaluates how quickly a company collects payments from its customers. A higher turnover indicates efficient credit management.
- Market Ratios:
- Price to Earnings (P/E) Ratio: This ratio helps assess a company’s valuation relative to its earnings. A high P/E ratio might suggest the market expects significant future growth.
- Price to Book (P/B) Ratio: It compares a company’s market value to its book value, indicating whether the stock is overvalued or undervalued.
- Operating Efficiency Ratios:
- Return on Assets (ROA): It measures how efficiently a company uses its assets to generate profits.
- Return on Equity (ROE): This ratio shows how effectively a company utilizes shareholders’ equity to generate profits.
- Growth Ratios:
- Earnings Per Share (EPS) Growth: It reflects a company’s ability to increase its earnings over time. Consistent growth is generally favorable.
- Revenue Growth: Indicates a company’s ability to expand its top-line sales. Sustainable revenue growth is vital for long-term economic health.
- Dividend Ratios:
- Dividend Yield: It helps investors assess the income potential of a stock. A higher yield might be attractive to income-oriented investors.
- Dividend Payout Ratio: It shows the proportion of earnings a company pays out as dividends. A high ratio might indicate limited reinvestment for growth.
In economic analysis, these ratios are used not only to evaluate individual companies but also to make industry comparisons and assess economic trends. They provide a snapshot of a company’s financial position, helping investors and analysts make informed decisions and gauge the overall economic health of a sector or the broader economy. However, it’s crucial to consider these ratios in context and alongside qualitative information for a comprehensive economic analysis.