- THE IMPACT OF PERFORMANCE EVALUATION THROUGH THE ANALYSIS OF FINANCIAL STATEMENT ON INVESTMENT DECISIONS (A CASE STUDY OF LOGMAN NIGERIA PLC.)
- EFFECTS OF PERFORMANCE EVALUATION THROUGH THE ANALYSIS OF FINANCIAL STATEMENT ON INVESTMENT DECISIONS (A CASE STUDY OF LOGMAN NIGERIA PLC.)
- IMPACT OF FOREIGN DIRECT INVESTMENT (FDI) ON THE ECONOMIC GROWTH OF DEVELOPING ECONOMIES (A CASE STUDY OF NIGERIA)
- THE EFFECT OF RATIO ANALYSIS IN INVESTMENT DECISION (A Study of First Bank Nigeria Plc.)
- HUMAN RESOURCES ACCOUNTING AND FINANCIAL PERFORMANCE OF BANKS IN NIGERIA(A STUDY OF LISTED BANKS IN NIGERIA)
- PRODUCT DEVELOPMENT AND MARKETING FINANCIAL SERVICES IN A COMPETITIVE BANKING ENVIRONMENT (A CASE STUDY OF ZENITH BANK PLC)
- ANALYSIS OF MANAGEMENT AND PERFORMANCE IN FINANCIAL INSTITUTIONS (Cadbury Nigeria Plc and Nestle Food Nigeria PIc.)
- INVESTMENT APPRAISAL AND PROJECT EVALUATION TECHNIQUES AS TOOLS FOR DECISION MAKING IN AN ORGANIZATION (A CASE STUDY OF MOBIL OIL NIGERIA PLC.)
- IMPACT OF FINANCIAL RATIO ANALYSIS ON INVESTMENT DECISION IN A MULTINATIONAL COMPANY (A STUDY OF GUINNESS NIGERIA PLC.)
- A COMPARATIVE ANALYSIS OF THE IMPACT OF INVENTORY VALUATION METHODS ON FINANCIAL REPORT STATEMENT IN MANUFACTURING COMPANIES
INVESTMENT DECISION AND FINANCIAL STATEMENT ANALYSIS (A STUDY OF ZENITH BANK OF NIGERIA)
This study is aimed at examining the significance of financial statement analysis on investment decision, i.e. the important roles it plays in identifying the strength and weaknesses in the operations of a business entity as well as how it keeps users informed about the financial status of the reporting entity. The Model employed in this study is the Square Model concept developed by Professor Thomas Polesie (1991) which gives a simple overview of a company’s financial situation at a given point in time. The Square Model is a closed model built on accounting terms and the borders of the square illustrates the relations between the financial measures from the balance sheet and the income statement
Findings to this study reveals that many investors are known to have entered into investment ventures without properly understanding the profitability and solvency situation, thus making and implementing wrong decision. They adpot various techniques which cannot be associated with wise investment decision and loose their investment afterwards.
Both primary and secondary data shall be the basis of this research work. The primary data shall be generated by means of a well-structured questionnaire instrument to ensure objectivity of findings. The secondary data will also be collected from textbooks, journals and other relevant publications.
It is however recommended that investors should ensure that financial statement used during ratio analysis are compared with the accounting policies applied and companies should adopt financial reporting strategies that are practical and understandable to potential investors. On the same line, other factors such as industry trends, changes in technological development, consumer tastes and changes within the firm should be considered when making judgment about the future of an organization. Financial literacy is the key to savings and investing (Norman 2003).
TABLE OF CONTENTS
Title Page i
Certification Page ii
Dedication Page iii
Acknowledgement Page iv
Table of content vi
Chapter One: INTRODUCTION
1.1 Background to the study 1
1.2 Statement of the Problem 3
1.3 Aim and Objective of the study 3
1.4 Relevant Research Questions 4
1.5 Relevant Research Hypothesis 4
1.6 Significance of the Study 5
1.7 Scope of the Study 5
1.8 Definition of Terms 6
Chapter Two: LITERATURE REVIEW AND THEORITICAL FRAMEWORK
2.1 Preamble 12
2.2 Theoretical Framework of the study 12
2.3 Empirical Review of Previous Work 15
Chapter Three: RESEARCH METHODOLOGY
3.1 Preamble 50
3.2 Research Design 50
3.3 Population of the Study 50
3.4 Sampling, Procedure and Sampling Size 51
3.5 Data Collection Instrument and Data Validation 51
3.6 Method of Data Analysis 51
3.7 Limitation of the Methodology 51
Chapter Four: DATA PRESENTATION AND ANALYSIS
4.1 Preamble 54
4.2 Presentation and Analysis of Data According to Research Questions 54
4.3 Test of Hypothesis 63
4.4 Discussion of Finding 63
Chapter Five: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings 67
5.2 Conclusion 69
5.3 Recommendations 70
Bibliography (American Psychological Association (APA) Style) 72
1.1 BACKGROUND TO THE STUDY
A decision is a choice between two or more alternatives. The implementation of meaningful decision gives way for achievement of investment goals and objectives while implementation of wrong decision give rise to investment failure.
The ultimate objectives for investment are profit maximization and growth thus it becomes necessary that capital decision have to be made and implemented so as to achieve the aforementioned objectives.
Investment decision in this context refers to both short term and long term reallocation of funds. Short term investment decision include the level of current asset (cash, debts and inventories) necessary for day to day operations whereas long term investment decision refers to fixed asset purchase, mergers, acquisition and corporate re- organization.
Financial statements provide the information to the analysts predicting fundamental value of the organization. Users must understand what the numbers of statements are saying and which numbers are showing red flags.
Financial Statement Analysis is a process by which analytical tools and techniques are applied to financial statements and related data to derive estimates and hints, which are necessary to make important business decisions. (Bernstein L.A, 2004). It is both a screening and a forecasting tool crucial for selecting investment or merger candidates and forecasting future conditions and consequences. It is also a diagnostic and evaluation mechanism in assessing financing, investing, and operating activities for managerial and other business decisions. FSA diminishes our uncertainty in decision making and establishes an effective and systematic basis for making business decisions
The Companies and Allied Matters Act 1990 gives a list of those statements that makes up the financial statement and they are as follows:
1. Statement of Accounting policies
2. Profit and Loss or income statement
3. Balance Sheet
4. Notes to the Account
5. Auditors Report
6. Directors Report
7. Cash Flow Statement
8. Value Added Statement
9. Five year financial summary
Financial analysis via ratios is sometimes referred to as ratio analysis or accounting ratios analysis interpreting investigation into financial statement. The ratios derived from financial statements are used in three different ways namely:
1. Structural analysis
2. Time series analysis
3. Cross sectional analysis.
For investment executions, decision such as buy, certain or sell are necessary. Equally, decision for evaluating management performance, as well as current and future level of risk and profitability is all important. Meaningful decision in all the above mentioned areas will help for a good choice among available portfolio of assets, dividend yield, total return as well as liquidity.
In this project study, concentration will be based on such financial ratio as:
a. Profitability ratio
b. Liquidity ratio
c. Long Term solvency and stability ratio
d. Market value ratio
1.2 STATEMENT OF THE PROBLEM
It has been observed that as a result of people’s inability to analyze a company’s financial statements; they more often than not ‘invest blindly’. In efffect, people buy into companies without knowing its fianancial health status . This is largely due to poor understanding and interpretation of financial records and in most cases, people that can analyze financial statements do not take the pain to do the necessary home work before investing, they adpot various techniques which cannot be associated with wise investment decision and loose their investment afterwards.
Many investment are carried out without emphasis laid on those investments that would generate profitable returns in the future, the risk involved and the benefits to be derived if embarked upon given the scare financial resources and the resultant effect of failure.
Consequently, this study seeks to find out tools that will aid in making meaninful decision thereby opening investors eyes to the role of financial statements analysis in that regard.
1.3 AIMS AND OBJECTIVE OF THE STUDY
The main objective of this study is to examine the impact of financial statement analysis on decision making while the specific objectives are:
a) To identify how financial statement analysis can help in making meaningful decision, which will enhance investment structure and goal realization
b) To demonstrate the interpretation of computed ratios.
c) To ascertain the different decision bench marks employed by investment
d) To identify factors to be considered before choice of investment
e) To identify and explain the relationship between financial statement analysis and investment decision.
1.4 RELEVANT RESEARCH QUESTIONS
The dimension that this research will cover will be based on the following questions, which will help in increasing an insight into the problems under investigation.
1) How does the analysis of financial statement influence investment decision?
2) Do ordinary investors understand the use of financial ratios?
3) Do investment proposals require analysis or evaluation to be made on them?
4) Does ratio analysis facilitate proper understanding of the financial statement?
1.5 RELEVANT RESEARCH HYPOTHESIS
Ho: There is no significant relationship between investment decision and financial statement analysis.
H1: There is significant relationship between investment decision and financial statement analysis.
1.6 SIGNIFICANCE OF THE STUDY
The researcher hopes that the findings and recommendations of this project work will be of great importance to many interested persons. The significance of the study will include the following.
a. It will serve useful purpose to investors, the importance of making meaningful investment decisions through analyzing financial statement of an investment at any point in time,.
b. To create an awareness of the risk associated with a particular investment as it can be revealed through analysis of financial statements of such investment thus calling for proper decision making
c. Expose investors to the benefit derived in making meaningful decision among alternatives that will be of goal outcome for an investment
d. To expose investors to awareness on how the setbacks and bitter experienced witnessed from investment failure can be totally eradicated through implementation of meaningful decision.
1.7 SCOPE OF THE STUDY
This research work will be conducted among selected investors on the Nigerian Stock Exchange (Lagos). The localization of the study is informed by the financial constraints on the part of the researcher. The study has also been subjected to time constants because it was carried out single handedly by the researcher. Hoarding and dearth of relevant information constituted impediment and limitations in themselves.
1.8 DEFINITION OF TERMS
To enhance a proper understanding of this research work, the following technical terms have been defined.
A. DECISION MAKING
There is a deliberate process that leads to the taking of action. Decision making is used essential in execution of both long and short term plans. Relevant information for decision making must be expressed in forms of financial or quantitative analysis in order that a rational choice can be made.
B. FINANCIAL STATEMENT
This is records that contains financial reports of an investment or business entity.
C. LIQUIDITY RATIOS:
They measure the ability of the firm to meet its obligations as they become due. The liquidity ratios by establishing a relationship between cash and other current assets to current obligations provide a quick measure of liquidity.
D. CURRENT RATIO
This is computed by dividing current assets by current liabilities current assets include cash marketable securities, accounts receivables and inventories.
E. LEVERAGE RATIONS:
Leverage ratios measure the funds supplied by the owners of the business as compared to the finance provided by the firms creditors.
F. TOTLA DEBT TO TOTAL EQUITY
This is a measure of the relative claims of creditors and owners against the firm’s assets.
G. TIME INTEREST EARNED RATIO
It measures the degree to which earnings can decline without resultant financial problem to the firm because of its inability to meet interest cost.
H. ACTIVITY RATIOS:
These ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assts. The activity ratios involve a relationship between sales and various assets. A proper balance between sales and assets generally reflects that assets are managed very efficiently.
I. TOTAL ASSETS TURNOVER
It measures the capacity with which total assets are utilized to generate the firms turnover. It is calculated by dividing sales by total assets.
J. CAPITAL EMPLOYED TURNOVER
The capital employed is the permanent or long run funds entrusted to the firm by the creditors and owners.
K. PROFITABILITY RATIO
These ratios examine how effectively the firm is being managed. The managers, creditors, shareholders, as well as the employees of the firm are interested in the profits of the firm. It assess the economic condition of an investment. It shows profitability in relation to investment . they indicate efficiency of operation.
L. GROSS PROFIT MARGIN
This margin is used to evaluate the spread between sales revenue and the cost of goods sold. It is computed by diving gross profit by turnover.
M. NET PROFIT MARGIN
The ratio measures the management efficiency in the administration of the business. It is used to determines the return on per Naira of sales.
N. RETURN ON CAPITAL EMPLOYED
It measures how well the management has utilized funds supplied by the shareholders and creditors.
O. RETURNS ON TOTAL ASSETS:
It measures the rate of efficiency with which the firm has employed its assets for purposes of making profit.
P. EARNING PAY-OUT RATIO
This is the ratio that represents the position of investment earnings that is paid as dividend to shareholders.
Q. EARNING YIELD
This is measurement of return on investment.
R. INVESTMENT FIRMS
These are firms associated with commitment of resource for gains actualization.
S. RETURN ON INVESTMENT
This measures the efficiency with which an investment has utilize the total fund available in generating profit.
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