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AN EVALUATION OF CORPORATE

PERFORMANCE USING FINANCIAL RATIO

ANALYSIS: A STUDY OF FIRSTBANK OF

NIGERIA PLC MAKURDI BRANCH

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TABLE OF CONTENTS

Contents Page

Title page … … … … … … … i

Certification … … … … … … … ii

Dedication … … … … … … … iv

Acknowledgement

… … … … … … … v

Table of contents

… … … … … … … vi

List of tables … … … … … … … ix

Abstract … … … … … … … x

CHAPTER ONE: INTRODUCTION1.1 Background to the Study …. …. …. …. …. ….

…. 11.2 Statement of problem … …. …. …. …. …. …. 31.3 Objectives of the study1.4 Research Questions1.5 Significance of Study1.6 Scope and limitation of study

CHAPTER TWO: LITERATURE REVIEW2.1 Introduction2.2 Conceptual and Theoretical Framework of the

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Impact of Financial RatioAnalysis on Corporate

Performance

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2.3 Basic financial statement2.4 Types of ratios and their interpretations2.5 Standard of Comparison2.6 Uses of Financial Ratios2.7 Limitations of Ratios Analysis2.8 Empirical Review of Related Literature

CHAPTER THREE: RESEARCH METHODOLOGY3.1 Introduction3.2 Research design3.3 Research Hypotheses3.4 Population and Sampling plan3.5 Source of relevant research data3.6 Procedure for data collection3.7 Data processing and analysis techniques3.8 Model Specification

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND

INTERPRETATION

4.1 Introduction4.2 Data presentation and analysis of data4.2.1 Data Validity Test4.3 Test of Research Hypothesis4.4 Interpretation of Results

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CHAPTER FIVE: SUMMARY, CONCLUSIONS AND

RECOMMENDATIONS

5.1 Introduction5.2 Summary5.3 Conclusions5.4 RecommendationsBibliographyAppendix

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LIST OFTABLES

Table 4.1 Descriptive Statistics …. …. …. …. ….…. 37

Table 4.2 Regression Model Summary… …. …. …. ….38

Table 4.3: Regression Coefficient … …. … …. ….…. 38

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ABSTRACT

This research study was conducted to show the evaluation ofcorporate performance using financial ratio Analysis. Attention is paid

to the identification of different types of financial ratios, basic financialstatement on which financial ratios are applied, various standards ofcomparison and interpretation of financial ratios. First Bank Nigeria Plcsummary of Annual financial statement for the last five years guided thisstudy. Only secondary data was used for this study and were analyzedusing the ordinary least square multiple regression and descriptivestatistics. The findings of the study reveal that financial ratios have asignificant impact on the corporate performance of first bank Nigeria plc.The study recommends that more ratio analysis techniques should beadopted to effectively monitor corporate performance, improveprofitability and increase organization competitive advantage.

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Financial Analysis is the summarizing of large

quantities of financial data for the purpose of

evaluation and comparison of performance of a company

over time, it’s more or less the process of reducing a

large amount of historical financial data, taken from

financial accounting statements, to a smaller set of

information more useful for decision making Archer

(2009). This analysis is usually done through the use

of accounting ratios otherwise known as Financial

Ratio.

American Institute of Certified Public Accountants

defines Accounting as an art of recording, classifying

and summarizing in a significant manner and in terms of

money, transactions, events which are in part at least

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of financial characters and interpreting the results

thereof. Every firm communicates financial information

and operating performances to shareholders and other

interested parties through its financial statements and

reports presented as annual reports.

Financial statements however show the financial

position of the firms at a particular point in time. It

shows how funds invested in the firm have been

utilized. There are various parties that are interested

in the performance of the firms such as shareholders,

debenture holders, investors, bank managers, financial

journalists,

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creditors, professional advisers, government,

other competitors and finally the public at large.

Ratio on the other hand is the relationship that

one item bears to another, the latter is known as the

base and is divided by the former (Hawkings et al

2011). Financial Ratios provide a means by which

various items in the account are related to an

appropriate base usually the sale or the capital of a

business. Analysis of rates can disclose relationships

as well as a basis for comparison which reveal

condition and trends that cannot be detected by

inspection of the individual components of the ratio

and if they are properly interpreted, point the way

to areas requiring further investigation and enquiries.

The management, having the task of running a

business efficiently will be interested in all ratios.

Managers naturally wish to compare their performance

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over the past years with selected market and

profitability objectives and with the performance of

competitors.

Basically, existing and future shareholders will be

interested in investment ratios, which indicate the

level of return that can be expected on an investment

in the business. The investors wish to predict future

dividends and changes in the market price of the

company’s common stock. Since changes in both dividends

and prices are likely to be influenced by earnings,

investors may seek to predict earnings.

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Banks and other financial institutions are also

interested in the solvency of a firm (i.e. ability to

pay its debt). Short-term solvency is affected by the

liquidity of the companies, which is the company’s

state of possessing liquid assets such as, cash and

other assets that will soon be converted to cash.

Since short-term debt must be paid within the

stipulated short time, liquid assets must be available

for their payment.

Long-term creditors are interested in a company’s

long term solvency, which is usually determined by the

relationship of a company’s assets to its liabilities.

Generally, a company is considered solvent when its

assets exceed its liabilities so that the company has a

positive shareholder’s equity. The larger the assets

are in relation to the liabilities, the greater the

long term solvency of the company.

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Ratio Analysis techniques help compares and

interprets significant features on financial

statements. It’s on the basis of this analysis that

those interested in the financial statement can get

better insight about a firm’s strength and weakness.

1.2 STATEMENT OF PROBLEMAlthough financial accounting statements shows the

financial positions of a business at the end of a

financial period, but they do not present accurate

performance on the level of performance or efficiency

of operations of a business at the end of financial

period.

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It is usually observed that the operating profit

figure of a company might be higher in the current year

than the previous year but this higher profit figure

cannot be used to say the company has performed better

in the current year than in the previous because the

cost of the asset is being considered at the beginning

of that first year which may reduce the profit for that

period. If it is judge based on this, it will have

adverse or negative impact on the investment or

investors.

Many investors in Nigeria are uneducated or

illiterate and as a result of ignorance or

inexperience, they cannot use or employ financial

ratios in evaluating the performance of the companies.

Also existing shareholders use the cash dividends and

interest paid to them in evaluating the performance of

the companies for investment decision. These parameters

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do not give accurate information about the performance

and efficiency of operation of the companies.

Some managers do not employ financial ratios in

performance appraisal and in the evaluation of

investment decision because of technicalities involved

in financial ratio analysis, fear of assessment and in

experience. Therefore, they make use of other

alternatives instead of using financial ratios.

Because of all these problems, this research seek

to empirically investigate to what extent has financial

ratios impacted on the evaluation of corporate

performance.

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1.3Objectives of the Study

The main objective of this study is to assess the

use of financial ratio in evaluating corporate

performance of First Bank Nigeria plc.

The specific objectives of the study include:

i. To examine the extent to which the use of

current ratio has impacted on corporate

performance of First Bank Nigeria plc

ii. To examine the extent to which the use of Acid

test ratio has impacted on corporate performance

of First Bank Nigeria plc

iii.To examine the extent to which the use of net

profit margin ratio has impacted on corporate

performance of First Bank Nigeria plc

iv. To examine the extent to which the use of

return on investment has impacted on corporate

performance of First Bank Nigeria plc

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v. To examine the extent to which the use

of earnings per share has impacted on

corporate performance of First Bank Nigeria plc

1.4 Research Questions

i. To what extent has the use of current ratio

influenced the evaluation of corporate performance

of First Bank Nigeria plc?

ii. To what extent has the use of acid test ratio

influenced the evaluation of corporate performance

of First Bank Nigeria plc?

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iii. To what extent has the use of net

profit margin ratio influenced the evaluation

of corporate performance of First Bank Nigeria plc?

iv. To what extent has the use of return on investment

influenced the evaluation of corporate performance

of First Bank Nigeria plc?

v. To what extent has the use of earnings per share

influenced the evaluation of corporate performance

of First Bank Nigeria plc?

1.5 Significance of the Study

Basically, this study will expatiate and in

greater details, the benefits that can be derived from

the application of financial ratio analysis as tool for

performance measurement.

It will help to highlight various areas of interest

which includes profitability trends and scope for

improvement, solvency, ownership and control,

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financial strength, borrowing potential, gearing and

interest cover, dividend cover. It will help the

organization in measuring performance in the industry

it operates.

1.6 Scope and Limitation of Study

The use of financial ratio in evaluating corporate

performance is a broad sphere of study in that, it

covers a great expanse of time series since its

introduction to its present state, these observations

are so numerous that a lot of

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time and resources would be spent for any

comparative and comprehensive study to be

undertaken in arriving at a reasonable conclusion.

Based on this fact, the scope of this research

work will be limited to the use of financial

ratio in evaluating corporate performance of first

bank from 2007-2011.

This study deals mainly with the application of

financial ratio for measuring corporate

performances. My computation is solely on financial

statements of company under review (First Bank of

Nigeria Plc).

Furthermore, the problem of time shortage and

insufficient funds cannot be over looked. This has

made me to limit my study to only one company.

However, effort shall be made to explore all the

necessary units within the departments in order to

improve on previous work.

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