Relevance Of Financial Ratio Analysis In The Appraisal Of Small Scale business
(A Case Study Of Selected Small Scale Company In Cross River State)
Financial ratio analysis plays a pivotal role in evaluating the performance and viability of small-scale businesses. By examining key financial indicators, such as liquidity, profitability, and solvency, stakeholders can gain valuable insights into the financial health of these enterprises. Ratios like the current ratio and quick ratio help assess the company’s short-term liquidity and ability to meet immediate obligations. Profitability ratios, including return on investment and gross profit margin, provide an understanding of the business’s earning capacity. Moreover, solvency ratios like debt-to-equity ratio gauge the company’s long-term financial stability. Small-scale businesses often face resource constraints, and financial ratio analysis allows for a nuanced understanding of their financial strengths and weaknesses, aiding informed decision-making by investors, creditors, and management alike in fostering sustainable growth.
This research work examined the relevance of financial ratio analysis in the appraisal of small scale business with particular reference to Mr. Biggs fast food in cross river state. The study examined the establishing of the extent to which accounting ratio can be used to interpret accounting records of small scale business, finding and analysing the meaning of financial ratio analysis to the researcher knowledge and understanding of financial statement of the company, to establish the effect of ratio analysis on the users of financial statement and to highlight available ratios for measuring the true state of performance of company. The data were collected from both primary and secondary sources, while primary data was collected by the use of questionnaires; the secondary data were based on readings from textbooks, internet and journals. Data from the response to questionnaire was presented using the statistical tool Chi- square. From the analysis, the findings showed that non challant attitude in the use of financial statement affects small scale business; obsolete use of data affects small scale business and also that lack of competent management affect small scale business. It was however recommended that the retained earnings of the small scale business should be properly invested in order to have more capital for business
Title page i
Approval Page ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
CHAPTER ONE:
INTRODUCTION
1.1 Background of the study 1
1.2 Statement of the problem 2
1.3 Objectives of the Study 2
1.4 Research questions 3
1.5 Research Hypothesis 3
1.6 Significant of the study 4
1.7 Scope of the study 4
1.8 Limitation of the study 5
1.9 Historical background of the case study 5
CHAPTER TWO:
LITERATURE REVIEW
2.1 Coherent Literature review (Academic review) 7
2.2Financing of small scale business 9
2.3 The nature and scope of financial ratio analysis1 2
2.4 Financial analysis and its uses to firm 15
2.5 Tools for financial analysis 17
2.6 Ratio analysis and standard of comparison 19
2.7 Types of financial Ratio
2.8 Relevance of financial Ratio analysis 28
2.9 Inflation and financial analysis 30
2.10 Limitations of Ratio analysis 31
CHAPTER THREE:
RESEARCH METHODOLOGY
3.1 Research Design 33
3.2 Sources of Data 33
3.3 Area of Study 34
3.4 Population of the study 34
3.5 Sample and sampling techniques 34
3.6 Viability of the instrument 35
3.7 Reliability of the instrument 36
3.8 Method of data analysis 36
CHAPTER FOUR:
DATA PRESENTATION AND ANALYSIS
4.1 Analysis and interpretation of responses 37
4.2 Analysis of questionnaire 40
4.3 Test of Hypotheses 50
CHAPTER FIVE:
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings 61
5.2 Conclusion 62
5.3 Recommendations. 63
Appendix 65
Bibliography 66
INTRODUCTION
1.1BACKGROUND OF STUDY
Financial ratio analysis assumes that there is a relationship between certainaspects of
the activities of the firm as revealed in the income statements, Accounting figures
reported in the financial statement do not provideProfit and loss accountand the
balance sheet, which established a pattern of behaviour. The information contained in
the financial statement of a company isconnected with the financial well being and
performance of the reporting entity, organized to enable users of financial statement
to draw a conclusionmeaningful understanding of the performance of the financial
position of a firm, except the figure are analyzed with other relevant information
throughthe use of financial ratio analysis.
Having established the fact that a ratio is useful and reliable in measuring the
relationship between two things, this then gives rise to the need to study the relevance
of the financial ratio in the appraisal of small scale business.
1.2 STATEMENT OF PROBLEM
The study is beset by a lot of problems which include:
– Problems of non-challant attitude on the use of financial ratio in the interpretation of
accounting records of small scale business
– Lack of available ratio for measuring the state performance of a company
– Lack of competent management
– Obsolete use of data.
1.3 OBJECTIVES OF STUDY
The main purpose of this study is to identify and consequently analyze the relevance
of financial ratios in the appraisal of small scale companies in Cross river state.
In view of the above, the researcher intends to find the following:
– To establish the extent to which accounting ratio can be use to interpret accounting
records of small scale business.
– To identify the available ratio for measuring the state of performance of a
company.
– To established the effect of ratio analysis on the users of financial statement.
– To ensure current data‟s are use in small scale business.
1.4 RESEARCH QUESTIONS
The study will examine the following questions:
– Dose non-challant attitude in the use of financial statement affects small scale
business?
– Is ratio analysis a measure of quality into consideration when measuring the
performance of the firm?
– Does obsolete use of data affect small scale business?
– Is ratio analysis a dependable tool of financial analysis?
1.5 RESEARCH HYPOTHESES
Based on the problems and objectives, the following hypotheses are formulated for
study.
Hypotheses1
H0: Non-challant attitude in the use of financial statement does not affect small scale
business
H1: Non challant attitude in the use of financial statement affects small scale
business.
Hypotheses 2
H0: Obsolete use of data does not affect small scale business
H1: Obsolete use of data affects small scale business
Hypotheses 3
Ho: Lack of competent management does not affect small scale business.
H1: Lack of competent management affect small scale business.
1.6 SIGNIFICANT OF THE STUDY
This research work will help in determining how the performance of a company can
be measured through the use ratio as a tool of financial analysis.
The study will help in reflecting a qualitative relationship between financial statement
of a different period and different firms. It will serve as a reference to other
researchers with the mind of having in depth insight about ratios and its performance
measuring abilities.
1.7 SCOPE OF THE STUDY
This study as the case may be covers the relevance of financial ratio analysis in the
appraisal of small scale business with particular reference to Mr. Biggs incross river
state. The study takes a holistic approach in its research to unveil the relevance of
financial ratio analysis in the appraisal of small scale businesses.
1.8 LIMITATION OF THE STUDY
The limitations involved in this research work include:
-Hostility and non cooperation on the part of the respondents.
-The levels of ignorance on ratios and illiteracy were very high e.g some business
officials refused to answer questions as they felt they would be indicated.
-Also financial implications were soaring high and this imposed certain restrictions
-Finally, the constraint of time was a limiting factor as all the areas of interest were
not covered by the researcher.
1.9 HISTORICAL BACKGROUND OF THE CASE STUDY
The company study Mr. Biggs plc. The research will delve into the relevance of
financial ratio maintain in those organization in order to access the element the
contain the role they play to interested parties both within and outside the
organisations.
Mr. Biggs plc
Mr. Biggs a division of U.A.C Nigeria plc, which is regarded as one of the fastest
growing quick service restaurants. It was founded in 1986 and since then, has
restaurant services. Mr. Biggs is Nigeria first chain of fast food restaurant owned by
conglomerate UAC of Nigeria plc. There are currently around first drive through
restaurant, with another four locations in Ghana. The restaurant is styled after mc
Donald‟s and is known for its red and yellow colour scheme. Mr. Biggs history
begins with coffee shop inside Kingsway Department stores in the 1960‟s. In 1973,
these shops were rebranded as Kingsway Rendezvous, which became Mr. Biggs in
1986.The chain rapid expansion after becoming one of the first Nigerian companies
to sell franchises to investors. Mr.Biggs specialty is the meat pie. a common lunch
might also include scotch egg, a sugared donot, chicken and a soft drink.
Whilewestern fare such as hamburgers are served. Nigeria delicacies such as jollof
rice and moi-moi are more popular. Birthday cakes are also a popular product and
Mr. Biggs bakery offers cake and pastries.
Relevance Of Financial Ratio Analysis In The Appraisal Of Small Scale business:
Financial ratio analysis is highly relevant in the appraisal of small-scale businesses for several reasons:
- Performance Assessment: Ratios help in evaluating the financial performance of a small business over a specific period. By comparing ratios over time, you can assess whether the business is improving or facing financial challenges.
- Comparative Analysis: Ratios allow for benchmarking a small business against industry averages or competitors. This helps in understanding where the business stands relative to others in the same sector and identifies areas that may need improvement.
- Risk Assessment: Ratios can help identify financial risks. For example, a high debt-to-equity ratio may indicate that a small business is highly leveraged, which can be risky during economic downturns.
- Liquidity Management: Ratios like the current ratio and quick ratio provide insights into a small business’s ability to meet its short-term obligations. This is crucial for day-to-day operations and financial stability.
- Profitability Analysis: Profitability ratios such as net profit margin, return on assets, and return on equity help gauge a small business’s ability to generate profits from its operations and assets.
- Efficiency Analysis: Ratios like inventory turnover and accounts receivable turnover help assess how efficiently a small business manages its assets, which can impact cash flow and profitability.
- Solvency Assessment: Ratios like the debt-to-equity ratio and interest coverage ratio help in evaluating a small business’s ability to meet its long-term obligations and interest payments.
- Investor and Lender Confidence: When seeking financing or investors, small businesses often use financial ratios to demonstrate their financial health and potential for growth, which can instill confidence in potential stakeholders.
- Decision-Making: Financial ratio analysis provides valuable information for decision-making. Small business owners can use this analysis to make informed choices about pricing, cost control, investment, and expansion.
- Early Warning Signs: By regularly monitoring ratios, small business owners can identify warning signs of financial distress or opportunities for improvement early on, allowing them to take corrective actions proactively.
- Strategic Planning: Ratio analysis is an integral part of strategic planning. It helps in setting realistic financial goals and developing strategies to achieve them.
- Creditworthiness: For small businesses seeking loans or credit, financial ratios play a significant role in determining their creditworthiness. Lenders use these ratios to assess the risk associated with lending to the business.
In conclusion, financial ratio analysis is a powerful tool for evaluating the financial health and performance of small-scale businesses. It provides valuable insights that can inform decision-making, attract investors or lenders, and ultimately contribute to the sustainability and growth of the business. However, it’s important to use ratio analysis in conjunction with other financial and non-financial information for a comprehensive appraisal of a small business.