FINANCIAL RATIO ANALYSIS AS A PREDICTOR OF COMPANY FAILURE
ABSTRACT
Financial analysis is the process of identifying the financial strengths and
weaknesses of a firm by properly establishing relationships between the assets and
liabilities and the performance of that particular firm. Commercial banks in Nigeria
need to undertake periodic financial analysis; this could not be unconnected with the
recent failures that engulfed the banking industry in Nigeria and its devastating
effects on both the customers and shareholders.
The study seeks to evaluate the efficiency of financial ratios analysis in
predicting corporate bankruptcy and failure in the Nigerian banking industry. This is
to guard against the possible loss suffered by numerous customers, owners and
other stakeholders who have interest in such financial institutions. An in-depth
analysis of financial statements of a firm tend to provide a deep insight into the
operations of that firm. This brings to the fore the genesis and the magnitude of
problems that subsequently result in poor performances. Therefore the use of
financial ratios in the analysis of performance, is an indispensable aid to appraising
true performance of firms. This will greatly help management to spot out financial
weaknesses of firms and to take suitable corrective actions. Thus, financial analysis
is the starting point for making plans before using any sophisticated forecasting and
planning procedures. This is necessary as understanding the past is a prerequisite
for anticipating the future.
In the course of this study, stratified random sampling was employed to
achieve the aims of this research work. The banks studied in this work were
categorised into two strata: first generation and new generation banks. Three banks
were strategically selected from the old generation banks while two banks were also
selected from new generation banks.
From the data obtained and the analysis made using various financial tools,
the financial condition of the banks under study was not very good, according to
Altman’s model and Osaze’s index respectively. Based on the analysis made using
the various tools of financial analysis, it is recommended that the banks should
majorly cut down their cost of operations and reduce their total debt. This will reduce
their operating expenses as well as interest charges paid annually to creditors.
TABLE OF CONTENT
Title page- – – – – – – – – i
Approval page – – – – – – – -ii
Dedication – – – – – – – – -iii
Acknowledgement – – – – – – – -iv
Abstract – – – – – – – – – -v
Table of content – – – – – – – -vi
CHAPTER ONE
INTRODUCTION – – – – – – – -1
1.0 Background of the study – – – – -1
1.1 Statement of the problem – – – – -5
1.2 Purpose of the study – – – – – -6
1.3 Significance of the study – – – – -8
1.4 Research questions – – – – – -9
1.5 Scope of the study – – – – – – -10
CHAPTER TWO
LITERATURE REVIEW – – – – – – -11
CHAPTER THREE
Research methodology – – – – – – -39
Design of study – – – – – – – -40
CHAPTER FOUR
Presentation, analysis and interpretation of data – -48
CHAPTER FIVE
Summary of findings – – – – – – -60
Conclusion – – – – – – – – -61
Recommendations – – – – – – – -62
Suggestions for further research – – – – -64
References – – – – – – – – -65
Appendix I – – – – — – – – -68
Questionnaire. – – – – – – – -69
FINANCIAL RATIO ANALYSIS AS A PREDICTOR OF COMPANY FAILURE
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