ASSESSMENTS OF FINANCIAL RATIO ANALYSIS AS A MEASURE OF ORGANISATIONAL PERFORMANCE

ASSESSMENTS OF FINANCIAL RATIO ANALYSIS AS A MEASURE OF ORGANISATIONAL PERFORMANCE (A STUDY OF SELECTED BANKS IN NIGERIA)

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Beyond crunching and depicting numbers in the financial statements, the primordial goal of financial management is creating wealth (Tugas, 2012). Wealth creation and general performance of any organisation are measured in terms of its financial strength and weakness using financial ratio (Shirkouhi, et al, 2012). Wealth creation is best achieved by maximizing firm’s value through optimal usage of resources over a long period of time (Tugas, 2012). In other words, it is the continuous and sustainable accumulation of more assets (growth) as time passes by. Putting these into perspective, wealth creation is a factor of a series of sound business decisions, made one after the other, that originate from structured or scientific basis. As risks are the ones that prevent any firm from achieving its objectives, coming up with structured and scientific bases of decisions reduces the likelihood of the former (risks). In financial management, one of these structured and scientific bases on which firm decisions are anchored is the financial statement analysis (Tugas, 2012).

According to Drake (2010), financial statement analysis is the selection, evaluation, and interpretation of financial data, along with other pertinent information, to assist in investment and financial decision-making. Moreover, it is also the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account (accounting for management website).

One of the tools in financial statement analysis is financial ratio analysis. As financial statements are usually lengthy, it will be more efficient and strategic to just pick up the figures that matter and plug them in pre-defined formulas developed through time by finance and accounting scholars. Financial ratios provide insight into the strengths and weaknesses of a business and give the managers indications of areas that need improvement (Heidari, 2012).

A thorough knowledge of which ratios to be used and how to use them is a critical management skill. The primary focus of every business is to make a profit, have enough liquidity to pay its bills and maintain control of borrowed funds (Heidari, 2012). Several ratios give managers the tools to evaluate these areas and measure their performance.

Businesses should constantly monitor these ratios to detect negative trends and identify areas that need improvement. Thus financial ratio information assists its financial statement users in obtaining the relevant information concerning the detail and source of cash for operating, investing and financing activities of the company over a reported period. While most business owners focus on providing exceptional products and services to their customers, they must also pay attention to the performance and health of their company (Heidari, 2012). This study is therefore concerned with the analysis of financial ratios as a measure of performance of commercial banks in Nigeria.

1.2       Statement of the Problem

Proper evaluation/measurement of a company performance for investors, shareholders and lenders is of paramount importance to management of all businesses in general. Performance evaluation using financial ratios from the statement of cash flow (SCF) have gained attention from academicians and industry practitioners (DeFranco & Schmidgall, 1998; Schmidgall, Geller, & Ilvento, 1993) as cited in (Ryu & Jang, 2004).

TOPIC: ASSESSMENTS OF FINANCIAL RATIO ANALYSIS AS A MEASURE OF ORGANISATIONAL PERFORMANCE

Chapters: 1 - 5
Delivery: Email

Number of Pages: 65

Price: 3000 NGN

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