Analysis Of Financial Statements As An Aid To Meaningful Invest Decision Making
(A Case Study Of Investment Firms In Enugu)
Financial statements serve as a vital tool for making informed investment decisions by providing a comprehensive view of a company’s financial health and performance. Through the analysis of income statements, balance sheets, and cash flow statements, investors can assess a company’s profitability, liquidity, solvency, and overall financial stability. By scrutinizing key financial ratios and trends, investors can identify potential risks and opportunities, allowing for better decision-making regarding investment allocation. Moreover, financial statements enable investors to compare the performance of different companies within the same industry, aiding in the selection of the most promising investment options. Ultimately, leveraging financial statements as a fundamental resource empowers investors to make sound investment decisions grounded in thorough financial analysis and evaluation.
It has been discovered that most investment firms do not implement meaningful decision that will enhance their meaningful opportunities. Also most of them do not study investment opportunities as to understand the risk associated with investment proposals as to make meaningful decision.
For these reason, the researcher wants to find out how financial statements analysis senses as an aid to meaningful decision by investment firms in Enugu state. Also how financial statement analysis are being used by them to make their investment decisions and how management implement the analysis ins their decision making process.
The researcher intend to adopt sample survey through the administering of questionnaires to the investment firms for data collection and statistical tools of analysis.
However, finance and time are of limitation in carrying out this research work, but at the end of this work, the need for financial statement analysis with be established.
The purpose of this research project was to find out how financial statement analysis service of our aid to meaning decision by investment firms in Enugu state. Financial statement analysis are used by investment firms to make their investment decisions. They are also used by management to make their decisions. Some of the ratio commonly computed by investment firms are profitability ratios, liquidity ratios. Market value ratios leverage ratios and ordinary share ratios.
This research project was embarked on because most investment firms do not implement meaningful decision that will enhance their meaningful opportunities. Moreover, most investment firms do not study investment opportunities as to understand the risk associated with investment proposals as to make meaningful decision based on that before investing their resources.
The methodology used in this work include subheadings like research decision, sampling procedure, data collection and method of data analysis as well as statistical tool of analysis.
The method of research design that was adopted in this study is the sample survey through the administering of questionnaire to investment firms. I was discovered that making investment decisions using financial statements analysis would very significantly with the profitability of the investment firms.
This is so because using chi-square to test our hypothesis. We discovered that the tabular value of 3.841 is less than our calculated value of 7.815.
We equally accepted the second test in the alternative hypothesis which stats that “there is significant relationship between decision computing with chi-square (X2) we had 3.841 while the tabular value is 3.841.
Thirdly, we also accept our alternative hypothesis in our third hypothesis which states that “There is significant relationship between investment decision and investment profitability because from calculated X2 we had 9.483 in the tabular value.
Lastly, we made recommendations to both investors and management in investment firms on how best to utilize financial ratios in making meaningful investment decisions.
Title page i
Dedication ii
Certification iii
Acknowledgement iv
Abstract v
Table of contents vi
CHAPTER ONE
1.0 INTRODUCTION
1.1 Statement of Research problems
1.2 Purpose of the study
1.3 Research questions
1.4 Statement of Hypothesis
1.5 Significance of the study
1.6 Scope and limitation of study
1.7 Operational definition of Terms
CHAPTER TWO
2.0 Review of related literature
2.1 Review of financial statement
2.2 The profit and loss Account or income statement
2.3 Notes to the financial statement
2.4 Balance sheet
2.5 Statement of source and application of fund
2.6 Objectives/usefulness of financial statement
2.7 The need for Analysis of financial statement
2.8 Ratio analysis
2.9 Users of Analysis of Financial statement
2.10 Limitations of financial ratios analysis
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Research Design
1.2 Sampling procedure
1.3 Data collection
1.4 Questionnaire
1.5 Data Analysis Technique and statistical test
CHAPTER FOUR
4.0 PRESENTATION, INTERPRETATION AND ANALYSIS OF DATA
4.1 Questionnaire analysis
4.2 Statistical test of the hypothesis
4.3 Testing hypothesis
CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, RECOMMENDATION AND CONCLUSION
5.1 Summary of findings
5.2 Recommendation
5.3 Conclusion
SAMPLE QUESTIONNAIRE
BIBILOGRAPHY
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:
1. The chairman board of directors report
2. The auditor’s report
3. Graphs and figures.
4. 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:
1. Structural analysis
2. Time series analysis
3. 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:
a. Profitability ratio
b. Liquidity ratio
c. Asset management ratio
d. 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:
1. How analysis of financial statement can help in making meaningful decision, which will enhance investment structure and goal realization
2. To ascertain the different decision bench marks employed by investment
3. 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.
1. To investment failure arise from implementing wrong decision?
2. Does poor decision implementation cripple investment grail actualization?
3. Are decision derived from analyzing financial statements?
4. Does poor management arise from inability to evaluate or analyzed investment opportunities?
5. To what extent are decisions derived from financial statement relied?
6. To what extent is decision derived from analysis of financial statement used?
7. How does investment firms make their decision?
8. 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.
a. 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,.
b. 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
c. Expose investors to the benefit derived in making meaningful decision among alternatives that will be of goal outcome for an investment
d. 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.
TOTAL 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.
SHARE PROJECT MATERIALS ON:
Analysis Of Financial Statements As An Aid To Meaningful Invest Decision Making:
Analysis of financial statements is a critical tool for making informed investment decisions. It involves examining a company’s financial reports, such as the income statement, balance sheet, and cash flow statement, to assess its financial health and performance. Here’s an overview of how analyzing financial statements aids in meaningful investment decision-making:
- Assessing Profitability:
- Income Statement Analysis: Investors can gauge a company’s profitability by analyzing metrics like revenue growth, gross margin, operating margin, and net profit margin over time. Consistent and increasing profitability is generally a positive sign.
- Evaluating Financial Health:
- Balance Sheet Analysis: By examining the balance sheet, investors can assess a company’s assets, liabilities, and shareholders’ equity. Key metrics like the current ratio and debt-to-equity ratio help in understanding the financial health and leverage of the company.
- Liquidity Assessment:
- Current Ratio: This ratio measures a company’s ability to cover its short-term liabilities with its short-term assets. A high current ratio indicates good liquidity.
- Cash Flow Analysis:
- Cash Flow Statement: Analyzing the cash flow statement helps investors understand how cash is generated and used by the company. Positive and consistent cash flow from operations is a positive sign.
- Growth Prospects:
- Revenue Growth: Steady revenue growth is a sign of a healthy business. Investors often look for companies with a history of revenue growth and consider future growth potential.
- Risk Assessment:
- Debt Analysis: High levels of debt can increase a company’s risk. Investors assess a company’s ability to service its debt through metrics like the interest coverage ratio.
- Profitability Ratios:
- Return on Investment (ROI): ROI measures the return earned on an investment. It helps investors assess the efficiency of capital allocation.
- Valuation:
- Price-to-Earnings (P/E) Ratio: The P/E ratio compares a company’s stock price to its earnings per share. It’s a common valuation metric that helps investors determine if a stock is overvalued or undervalued.
- Dividend Analysis:
- Dividend Yield: Investors seeking income often look at a company’s dividend yield, which compares the annual dividend payment to the stock price.
- Comparative Analysis:
- Investors often compare a company’s financials with those of its competitors or industry peers to identify relative strengths and weaknesses.
- Trend Analysis:
- Examining financial statements over multiple periods allows investors to identify trends and assess a company’s performance consistency.
- Management Quality:
- Financial statements can reveal the effectiveness of a company’s management in controlling costs, managing cash flow, and implementing growth strategies.
- Qualitative Information:
- Financial statements are often supplemented with qualitative information from company reports, news, and industry analysis to provide a more comprehensive view.
In conclusion, analyzing financial statements is a fundamental step in making meaningful investment decisions. It provides insights into a company’s financial health, performance, risks, and growth prospects, helping investors make informed choices and mitigate potential investment pitfalls. However, it’s important to note that financial statement analysis should be complemented with other forms of research and due diligence to make well-rounded investment decisions.