FINANCIAL ACCOUNTING RATIOS AS TOOLS FOR THE EVALUATION OF MANAGEMENT PERFORMANCE (A CASE STUDY OF NESTLE FOOD NIGERIA PLC)
ABSTRACT
The necessity to uncover the task confronted by most uneducated and illiterate indigenous and other African investors in various firms of their choosing drove this research work.
Nestle Food Nigeria Plc and its stakeholders were among the 30 respondents in the study. The annual accounts and reports for the five years 2000-2004 were used.
The personal interview approach is the research instrument used to elicit responses from respondents.
The following conclusions were reached as a result of this investigation.
Nestle Food Nigeria Plc’s capital structure is devoid of preference shares, which pay a predetermined dividend rate.
The company constantly evaluates its performance and sets higher goals to secure the company’s longevity in the best interests of all stakeholders.
It also suggests that Nestle Food Nigeria Plc make an effort to provide certain important financial facts to investors, such as the market price per share of its highly sought after shares on the Nigerian Stock Exchange floor.
TABLE OF MATERIALS
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CHAPITRE ONE
INTRODUCTION
1.1 THE STUDY’S BACKGROUND
Financial accounting informal ity, as reflected in financial statements of business entities, is the foundation for calculating accounting ratios of business concern. This, in turn, forms the foundation for evaluating both current and historical business (operational) 1) The performance of users of financial information, also known as stakeholders.
It is important to ensure that the information contained in financial statements is carefully organized in such a way that its users can draw reasonable conclusions about the reporting entity’s financial situation and performance (past, present, and future). One of the financial analytical instruments used in examining quantitative events (past, present, and expected future financial status) is the ratio.
Financial accounting ratios are proportions of fractions or percentages that express the relationship between one or more financial statements and other items in the same financial statement. Of the tools used in financial statement analysis and interpretation, the cash flow statement and accounting ratios have proven to be the most powerful.
1.2 THE PROBLEM’S STATEMENT
Although financial ratio analysis is the most powerful instrument for examining organizations’ financial and operating performance, the technique has several bottlenecks that are also inherent in financial statements created and presented to the public.
A significant disadvantage stems from the fact that facts and numbers generated primarily from historical narratives are subject to the same restrictions as historical accounts. As an example,
i. Financial ratio research based on historical data is useless for predicting a company’s future prospects.
ii. Financial ratios are quantitative data, such as changes in employee levels over time.
iii. Some financial statistics, such as the return on capital employed, are not commonly acknowledged as standard parameters in financial analysis (ROCE)
Closely related to this is the fact that financial statement figures are not adjusted for changes in the price level, leading to poor financial appraisal.
1.3 QUESTIONS FOR RESEARCH
The following research was created to evaluate Nestle Food Nigeria Plc’s financial health.
i. To what extent has the company been functioning profitably in terms of profit margin and asset utilization?
ii. Is the firm’s application of accounting policies consistent?
iii. Given the industry’s strategic competitive advantages, can the business sustain or increase its profitability and operating performance?
iv. Is the ratio of slow moving stock in the current asset mix high?
v. How frequently and efficiently does the company transfer its current assets to current liabilities?
vi. To what extent has the firm been able to manage its working capital efficiently?
vii. How effectively has the company converted its current assets into liquid cash?
1.4 HYPOTHESES FOR RESEARCH
The research endeavor aims to find answers to specific hypotheses that are crucial to the investigation. Among these hypotheses are:
1. HO: Ratio analysis aids in evaluating and measuring management’s operational and financial performance.
HA: Financial ration analysis does not help in assessing and measuring management’s operational and financial performance.
2. HO: The results of a well-conducted financial ratio analysis can be used to forecast future performance and management efficiency.
HA: The results of a well-conducted financial ratio analysis can be used to forecast future performance and managerial efficiency.
3. HO: Financial ratio analysis is utilized by stakeholders to make decisions.
HA: Financial ratio analysis is not used by shareholders to make decisions.
1.5 THE STUDY’S PURPOSE
This study is intended primarily to justify and place greater emphasis on the use of financial ratios as verifiable instruments. For assessing and measuring managerial performance and efficiency.
The primary goal of the research is to evaluate Nestle Food Nigeria Plc’s financial statements using financial ratios in order to identify.
i. The firm’s efficiency in making use of its assets
ii. The company’s profitability and productivity
iii. Whether the firm is capable of meeting its current financial obligations when they become due.
iv. The source of long-term funds used by the firm.
v. Whether the firm compares favorably to the established average industry ratio.
vi. How may shareholders and stakeholders successfully use financial ratio techniques to analyze the performance of the firm (s) of their choice?
1.6 THE STUDY’S OBJECTIVE
It is determined that the majority of the firm’s staff, particularly the top level managers, are unwilling to supply the necessary information relevant to the study, particularly the average industry ratios. As a result, the majority of the average industry ratios used in the study are based on prior experience in the sector. Furthermore, the accounting ratio under examination is only valid for five years. From the year 2000 through the year 2004.
1.7 THE STUDY’S SIGNIFICANCE
The primary goals of this research are as follows:
i. To explore the extent to which financial statements serve as a foundation for financial analysis in relation to financial ratios.
ii. To critically examine the firm’s performance and position within its industry, using accounting information communicated by prior years’ financial statements and annual reports.
iii. To ensure that the financial statements have been prepared and presented in accordance with the statement of accounting standards and other professional internal ional accounting standards.
iii. Determine if the firm in question can meet and face future problems and demands of both legal and social duties as a going concern.
1.8 THE STUDY’S LIMITATIONS
Essentially, the investigation is confined to the information provided by Nestle Food Nigeria Plc’s financial statements.
The study is also constrained by the responses supplied by the respondent during the personal interview, which was designed to collect necessary information for the study.
Above all, the study is constrained by the average industry ratio, which is not included in the firms’ annual reports and accounts.
Other imitations of the study conic in farm of the accounting rules, procedures, fundamentals, and methodologies used in the compilation and presentation of financial statements on which financial analysis is based.
1.9 TERMS DEFINITION
i. FINANCIAL ACCOUNTING RATIO: This is the proportion of a fraction or percentage that expresses the relationship between one account and another in the same financial statements.
ii. FINANCIAL ANALYSIS: This refers to the examination of past, present, and predicted future events of the firm’s financial situation and conditions with the goal of finding any weakness or strength in the firm’s performance.
iii. REPORTING ENTITY: This is an accounting word used to refer to the corporation whose financial statements are being evaluated using financial ratios.
iv. FINANCIAL INFORMATION: This refers to the information contained in the financial statement of the company being evaluated.
v. HISTORICAL ACCOUNT: A financial statement produced and presented in line with the historical cost concept, which holds that cost is the appropriate basis for original accounting recognition of all assets acquired, services given or received, and costs incurred.
vi. FINANCIAL APPRAISAL: This is the assessment or evaluation of the operating financial performance of the company’s management over time using financial ratios.
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FINANCIAL ACCOUNTING RATIOS AS TOOLS FOR THE EVALUATION OF MANAGEMENT PERFORMANCE (A CASE STUDY OF NESTLE FOOD NIGERIA PLC)
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