ABSTRACT
The study is aimed at finding out the
effects of financial analysis on investment decision. Using Dangote group of
companies (Dangote cement factory) as a case study. The area chosen for the
study was Dangote cement company at Gboko Benue state in Nigeria. Three
research questions guided the study. The objective of this study is to
investigate the effect of ratio analysis on expansion of existing business, to
analyze the effect of ratio analysis on establishment of a new business, assess
the effect of ratio analysis on reducing cost of replacement and modernization.
The hypothesis to be tested is the null hypothesis (H0); H01-Ratio analysis has
no significant effect on expansion of existing business, H02-Ratio analysis has
no significant effect on establishment of a new business, Ho3-Ratio analysis
has no significant effect on reducing cost of replacement and modernization in
an organization. An ex- post facto research design was adopted for the study.
The instrument for data collection was gotten from secondary data, after
careful analysis using [E-Views Computation], it was found out that ratio
analysis contribute immensely to the business expansion, establishment of new
business and cost replacement and modernization. From the findings, it was concluded
that financial analysis performs a crucial role on investment decisions making
and organization performance which has been shown to be major force in
investment decision making. It was recommended, that every organization and
manufacturing companies should ensure that all material facts as regard the
assets and equality of the organization should be reflected in their yearly
financial statement and experienced professionals and workers such as
accountants and auditors should be involved in financial analysis.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
OF STUDY
Financial
Statement Analysis is a method of reviewing and analyzing a company’s
accounting reports (financial statements) in order to gauge its past, present
or projected future performance. This process of reviewing the financial
statements allows for better economic decision making. Globally, publicly
listed companies are required by law to file their financial statements with
the relevant authorities. For example, publicly listed firms in America are
required to submit their financial statements to the Securities and Exchange
Commission (SEC). Firms are also obligated to provide their financial
statements in the annual report that they share with their stakeholders. As
financial statements are prepared in order to meet requirements, the second
step in the process is to analyze them effectively so that future profitability
and cash flows can be forecasted. Therefore, the main purpose of financial
statement analysis is to utilize information about the past performance of the
company in order to predict how it will fare in the future. Another important
purpose of the analysis of financial statements is to identify potential
problem areas and troubleshoot those problems. There are different users of
financial statement analysis. These can be classified into internal and
external users. Internal users refer to the management of the company who
analyzes financial statements in order to make decisions related to the
operations of the company. On the other hand, external users do not necessarily
belong to the company but still hold some sort of financial interest. These
include owners, investors, creditors, government, employees, customers, and the
general public. The managers of the company use their financial statement analysis
to make intelligent decisions about their performance. For instance, they may
determine cost per distribution channel, or how much cash they have left, from
their accounting reports and make decisions from these analysis results.
Small
business owners need financial information from their operations to determine
whether the business is profitable. It helps in making decisions like whether
to continue operating the business, whether to improve business strategies or
whether to give up on the business altogether. People who have purchased stock
or shares in a company need financial information to analyze the way the
company is performing. They use financial statement analysis to determine what
to do with their investments in the company. So depending on how the company is
doing, they will either hold onto their stock, sell it or buy more. Creditors
are interested in knowing if a company will be able to honor its payments as
they become due. They use cash flow analysis of the company’s accounting
records to measure the company’s liquidity, or its ability to make short-term
payments. Governing and regulating bodies of the state look at financial
statement analysis to determine how the economy is performing in general so
they can plan their financial and industrial policies. Tax authorities also
analyze a company’s statements to calculate the tax burden that the company has
to pay. Employees need to know if their employment is secure and if there is a
possibility of a pay raise. They want to be abreast of their company’s
profitability and stability. Employees may also be interested in knowing the
company’s financial position to see whether there may be plans for expansion
and hence, career prospects for them. Customers need to know about the ability
of the company to service its clients into the future. The need to know about
the company’s stability of operations is heightened if the customer (i.e. a
distributor or procurer of specialized products) is dependent wholly on the
company for its supplies.
Anyone
in the general public, like students, analysts and researchers, may be
interested in using a company’s financial statement analysis. They may wish to
evaluate the effects of the firm on the environment, or the economy or even the
local community. For instance, if the company is running corporate social
responsibility programs for improving the community, the public may want to be
aware of the future operations of the company. Analysis of financial statement
is meant to be comprehensive and relevant just to mention a few. To ensure that
this is the case, there are two methods of financial analysis; the horizontal
analysis, vertical analysis trend analysis, ratio analysis.
1.2 STATEMENT
OF PROBLEM
Manufacturing
companies have a nature that requires a great deal of record keeping based on
accounting principles and the ever changing accounting standards. It is clear
that proper analyses of financial statement are important in any organization.
Nevertheless, one can not dispute the fact that with each method of analysis
there is an underlying factor that hinders the comparability of records. Thus,
the problem at hand is the scheme of window dressing which an investor has to
be on the lookout for If he wants to make a good investment decision. Window
dressing is referred to as cosmetic financial reporting or creative accounting.
It is a situation whereby the financial statements are reported to deliberately
or intentionally falsify the accounts with the aim of overstating the
performance of a business. This could mislead a potential investor into a non
profitable investment decision. Proper financial analysis will open the eye of
not just the investor but also other users of such information. They will be
able to detect the loopholes and see a misleading financial statement for what
it is.
This
study aims at explaining the effects of financial statement analysis on
investment decision making in manufacturing industries. With that being said, it
is befitting to say that anything outside from a proper financial statement is
a problem to investors and users of accounting information. Thus window
dressing aims at destroying the essence of a proper financial statement,
thereby making room for unprofitable or unfavorable investment decision making.
Chapters: 1 - 5
Delivery: Email
Delivery: Email
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