RATIO ANALYSIS AS A TOOL FOR PERFORMANCE APPRAISAL IN FINANCIAL MARKET

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

The amount of proportion of one figure compare to another makes financial statement to be obviously important to enable user have a clear picture of position of organization. It report the liquidity and solvency of the company and the claim of it resources i.e. debt owned, the equity of the owner and present cash position of the company.

It comprises comparative balance sheet, profit and loss account, income statement, cash – flow statement, auditors report and some officer necessary information base on your assessment.

Despite the functions of financial statement many users often fail to comprehend fully on the information it intending to pass across, thus there desire are not met. This is due to ambiguous of the financial statement where by the volume of data figure mislead the user.

In this sense, the need for analysis and interpretation of statement are imperative. Financial statement can be converted and interpreted using three techniques.

1. Vertical or Static Analysis: It examine relationship within a statement, it deals with use of relative percentage value of the statement.
2. Horizontal or Dynamic Analysis: This involves comparison of financial statement in respect of the two or more years. The weakness of this analysis in that comparison with the past does not afford any basis for evaluation in absolute terms.
3. Ratio Analysis: Involve the use of two different economic units to ascertain performance. Ratio analysis commonly uses technique in analyzing financial statement. It is obviously paramount since it checks how strong or weak company is. Therefore, its interpretation is easily understood by the user.

1.2      STATEMENT OF THE PROBLEM

Financial ratio analysis it widely use to assess the performance of an enterprises.  Financial statement is prepared in terms of historical costs. They do fully reflect economic resources and managerial, hence poor decision may be made.

The users of financial information are carried away by the figures display in financial investment.

Observing the trends of the financial investment as assess whether their resources have been put to effective use. The analytical comparison of large information is a problem to the user.

Financial ration analysis should be applied to provide meaningful and quantitative presentation of the company and external creditors. Also there is need for financial analyst to produce a small and understandable data for good decision.

1.3      JUSTIFICATION FOR THE STUDY

Ratio analysis been what it is, as the production of relation for internal and external financial reports are important to summarize key relationship and result in order to appraise financial performance.

In its assessment, this research will be of immense value in recent knowledge of enterprises and managerial achievement. This research is very useful to user to supplement the existing knowledge of the user of financial ratio as guide towards the determining company’ achievement as well as show how financial ratio analysis can identify the strength and weakness of a company.

            The research work can also serve as material for student who are interested in the study of financial ratio as a tool for performance appraisal.

1.4      SCOPE OF THE STUDY

This study has limited to five year financial summary of the First Bank Nigeria Plc, profit and loss account, the balance sheet, value added statement, using ratio and adequate interpretation.

            This study is carryout base on the fact that amount presents a true and fair view of the company’s affairs and not misleading.

            More so, financial ratio will be compared with that of previous year using common size of statement trends analysis that is reaction of the economic unit over time of the firm horizontal analysis.

            The period was choosing because of the availability of financial statement representing it operation within the period 1999 – 2002.

1.5      LIMITATION OF THE STUDY

In the case carrying out the research the following limitation are encountered.

            The major limitation is the high cost of transportation and insufficient fund to other schools library subsequently to this problem is a combination of academic work with represent study. The refusal of asset to the unpublished information, which has been term confidential time factors “the time that was in the conduct of research constituted constrain of the study”

1.6      RESEARCH HYPOTHESIS

For the objective of the study the researcher would want to know the input of ratio analysis as a tool to measure managerial performance to ratio analysis can not serve as a tool for performance appraisal in Nigeria Financial Market.

H_i Ratio analysis can serve as a ratio for measuring profitability and efficiency of a firm while chi-square is used to rest the validity of hypothesis.