The Critical Evaluation Of The Uses Of Financial Rations In Financial Statement Analysis

The Critical Evaluation Of The Uses Of Financial Rations In Financial Statement Analysis

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  • Name: The Critical Evaluation Of The Uses Of Financial Rations In Financial Statement Analysis
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1.1              BACKGROUND OF THE STUDY

Financial statement is one of the most important documents used by the management of a firm in making decisions.   It shows vividly the  strengths and weakness of the firm, which in the process helps management to appraise the past performance of the firm and project into the  future.

Financial Ratio analysis employs basic financial data taken form the analysis of financial statements (Balance sheet and income statements) which is the primary financial report of mechanism of an entity both internally and externally.  An analysis of the financial information communication by the statement should include the computation and interpretation of financial ratios.  Although emphasis is focused on outside users such as creditors and owners management is aware  that their performance will be reviewed by these external parties and for other reasons. For  example, the basic  financial statements  are used to assess the effectiveness of management in planning  and controlling operations as well as for decision making.  Management also recognizes that the evaluation of past operations as  reveled by the analysis of the basic.  Statement represents a good staring point in planning future operations and serves as an important  means of assessing past performance  and in forecasting and planning future performance. Published financial  statement are properly oriented towards the long-term investor, who is mainly interested in  long-term earning power.

Short-term ability of their firm to satisfy   its obligation as they fall due. The amount of information an analyst seeks depends on the size of the investment he is considering and on his general familiarity with the springboard for their view.  He uses financial history  to help him obtain dues as to future performance.

Financial statement are usually prepared in line with generally accepted accounting principles (GAAP) and general accepted accounting standard (GAAS) and for one to understand what it contained there in, he must use an objective criteria to evaluate the content.  According to I.M. Panndey an accounting figure conveys meaning when it is related to some other relevant  information.  The relationship between two accounting figures, expressed mathematically is know  as a   financial ratio.  The relationship then becomes the index for a qualitative  judgement of the firm’s performance.  However, ratios indicate qualitative relationships, which can be used to make qualitative  judgement.  This is the nature  of all financial ratios.

Read Also:  Application Of Accounting Methods And Techniques In Appraising Rival Projects In Situations Of Risk And Uncertainty


The growth of Afribank can be likened to the proverbial mustered seed from a humbly beginning in 1960 when the first branch was established in Kano.  The bank has not only grown to be represented in many towns throughout Nigeria, but has metamorphosed into what is known today as the Afribank group.

The Afribank group is currently made up of six (6) subsidiaries namely:

1.                  Afribank Nigeria Plc.  (which servers as the hold company for the group in addition to anchoring the group’s commercial banks activities

2.                  Afribank international limited (merchant  banker)

3.                  Afribank insurance Brokers Ltd

4.                  ANP finance company Ltd, Dublin

5.                  Afribank Estate company Ltd

6.                  Afribank Trustees and securities Ltd.

Each of these subsidiaries is registered  and operates as an independent company.  Afribank Plc, which began operations on January 14th 1960, has grown to become one of the biggest for commercial banks in Nigeria with over 130 branches offering a wide rang of financial services to its numerous customers nation wide.  Apart from the traditional accounts ( savings, current and deposit accounts), the bank offers services such as corporate  finance, corporate cash management services, loans and advances,  agricultural finance, international trade services, correspondent banking, comprehensive advisory services amongst other complimentary services.  Afibank’s products are formulated to enhance their customer services delivery. The bank delivers courteous and professional services through highly skilled and experienced professional banker and has retained a great deal of customer loyalty over the years through this quality of services delivery.


The uniformed investor always makes his investment decision  based on guesswork, hunches and intuition. These methods are unreliable and misleading most times in decision making. For one to make an objective investment is to be made. Any evaluation of the firm’s operation cannot be complete without a reference to its financial statements, and any investment decision involving a firm may produce negative results if he firm’s operations over the period are not considered.

Since financial statement  portray the performance of any entity for a given period of time, this study has set to evaluate a method of   analyzing the firm’s financial statement or the benefit of the interested parties.  Although other analytical tools will be considered, the primary aim of this research is t critically examine the use of ratio in analysis of financial statement.


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