The Role Of Ratio Analysis In Business Decisions A Case Study Of O. Jacob Bros. Ent. (Nig.) Ltd., Aba, Abia State

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The Role Of Ratio Analysis In Business Decisions A Case Study Of O. Jacob Bros. Ent. (Nig.) Ltd., Aba, Abia State

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PROJECT TOPIC AND MATERIAL ON THE ROLE OF RATIO ANALYSIS IN BUSINESS DECISIONS A CASE STUDY OF O. JACOB BROS. ENT. (NIG.) LTD., ABA, ABIA STATE

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INTRODUCTION

BACKGROUND INFORMATION

The two primary objectives of every business are profitability and solvency.  Profitability is the ability of a business to make profit, while solvency is the ability of a business to pay debts as they come due.  (Hermanson et al, 1992: 824).  However, the achievement of these objectives requires efficient management of resources of the business through planning, budgeting, forecasting, control, and decision – making.  Also, the strengths and weakness of the business need to be identified and necessary corrective measures applied.  Interestingly, accounting provides information that facilitates these functions.

Basically, accounting measures and communicates economic information needed for decision –making.  Thus, the American Accounting Association (in Okezie, 2002:1) defined accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the information”.  Statement and the Balance Sheet.  The Income Statement shows the profitability or  profitability or operational result of a business, while the balance sheet shows the solvency or financial position of a business.

Although profiles are often used as the basis for judging the performance of a business, such profits must be related to the various items of the financial statements in order to be meaningful and useful for decision making. Furthermore, owing to the summarized nature of financial statements, a lot of truths are hidden in them. Thus, they need to the analyzed and interpreted by means of financial ratios to enable the users understand the meaning of the absolute amounts shown in them, and make informed business decisions.

In this regard, Essien (2006:144) observed:

Financial statements carry lots of financial Information that are hidden in the figures. The figures in financial statements become more useful when they are related to each other or to some other relevant financial data. Therefore, users of financial information go a further step to establish relationships (or ratios) among selected data in financial statements.

According to Igben (1999:423), “Accounting {or financial} ratio is a proportion or fraction or percentage expressing the relationship between one item in a set financial statements and another item in the financial statements. Accounting ratios are the most powerful of all tools used in analyzed and interpreting financial statements”. Therefore, ratio analysis involves taking stats of number (or items) out of financial statements and forming ratios with them, to enhance informed judgments and decisions (Lasher, 1997:66).

MCShane et al. (2000:336) defined decision-making as “a conscious process of making choices among one or more alternatives with the interior of moving toward some desired state of affairs.” Therefore, business decisions can be defined as choices relating to the allocation and/or use of business resources to achieve business goals.

Decision-making calls information. Bittel et al. (1984:340) observed: “Managers want information because they need to make decisions. The proper use of information is an important part of decision-making.” Remarkably, one of the effective ways of providing information needed for decision-making is ratio analysis.

Yes, business dictions of make or buy, investment or divestment, expansion or contration, capital-organization and reconstruction, and so on cannot be properly made without the aid of financial ratios. They give cue to the financial strengths and weaknesses of a business, and highlight aspects of a business requiring further investigation.

Therefore, this research is carried out to show ratio analysis help managers, shareholders, investors, creditors, and other stakeholders make informed judgments and decisions about the past performance, present condition, and futures potential of a business.

1.2   STATEMENT OF PROBLEM                     

Financial information provided in financial statements are useful in business decisions. However, it must be noted that financial statements are means to an and not an end in themselves. Thus the use of financial statements in decision-making is not always easy owing to the following problems:

In view of the summarized nature of the information contained in financial statements, they need to be analyzed and interpreted by means of financial ratios to enable management and stakeholders understand them and make well-informed business decisions. Many users of financial statements are not knowledgeable about accounting ratios and how the ratios can be applied to financial statements to aid decision-making. Despite the immense benefits of ratio analysis, there are a lot of weaknesses or limitations associated with its use.

In view of the above stated problems, this research is embarked upon to identify the proper use of financial ratios, and the roles ratio analysis plays in business decisions.

1.3   OBJECTIVES OF THE STUDY

In consideration of the problems identified above, the objective of this research include.

To show how ratio analysis facilitates proper understanding of information contained in financial statements. To show how ratio analysis aids business decisions. To examine the techniques used in analysis financial statements. To identify the usefulness of financial ratios in measuring and predicting the performance and financial position of a business. To unravel the obstacles to the proper use of financial ratios in business decisions. To suggest on ways to enhance efficient use of ratio analysis in decision-making.

1.4   RESEARCH QUESTIONS

Is ratio analysis useful in evaluating and prediction the performance of a business as well as intensifying areas that regret improvement? Do you agree with the fact that ratio analysis facilitates proper understanding of information contained in financial statements?

iii.    Is ratio analysis useful to management investors, shareholders and creditors in their business divisions?

Does financial ratio helps to unravel the mass of truth hidden in financial statements? Are there obstacles that affect the proper use of ratio analysis in business decisions?

1.5   SIGNIFICANCE OF THE STUDY

The significance of this study is that on its completion, the following benefits will be derived:

The study will help management of O. Jaco Brros. Ent. (Nig.) Ltd, Aba and others to know how ratio analysis can help them understand the financial contained in financial statements and enhance their business decisions. The findings of the research and the supportive reference materials will be of immense help to students in tertiary institutions and other researchers to investigate further in the area of study. It is hoped that the result of the research will facilitate optimal business decisions when the recommendations are complied with. The study will encourage businessmen, investors, managers, and government authorities to appreciate quantitative techniques like financial ratios when making economic and business decisions.

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