ROLE OF ACCOUNTING RATIO ANALYSIS ON BUSINESS DECISIONS IN NIGERIA
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ROLE OF ACCOUNTING RATIO ANALYSIS ON BUSINESS DECISIONS IN NIGERIA
Chapter one
INTRODUCTION
1.1 Background of the Study.
Igben (1999:423) defines an accounting or financial ratio as a proportion, fraction, or percentage that expresses the relationship between one item in a set of financial statements and another. Accounting ratios are the most effective instruments for analysing and analysing financial accounts.”
As a result, ratio analysis is extracting number (or item) statistics from financial records and converting them into ratios in order to make more informed judgements and decisions.
MCShane et al. (2000:336) described decision-making as “a conscious process of making choices among one or more alternatives with the interior goal of moving towards some desired state of affairs.”
As a result, business decisions can be described as choices regarding the allocation and/or use of corporate resources to achieve business objectives. Decision-making requires information. Bittel et al. (1984:340) noticed that managers desire information because they need to make decisions.
The proper utilisation of information is an essential component of decision-making. Remarkably, ratio analysis is one of the most effective techniques of giving information for decision-making.
Yes, commercial decisions such as make or buy, investment or divestment, expansion or contraction, capital organisation and reconstruction, and so on cannot be done correctly without the use of financial ratios.
They indicate a company’s financial strengths and weaknesses, as well as areas that need to be investigated further. Financial information contained in financial statements is useful in business decisions.
However, it should be recognised that financial statements are a means to an objective rather than an end in themselves. Thus, because of the summarised nature of the information contained in financial statements, their use in decision-making is not always easy; they must be analysed and interpreted using financial ratios in order for management and stakeholders to understand them and make well-informed business decisions.
As a result, the purpose of this research paper is to demonstrate how ratio analysis can assist managers, owners, investors, creditors, and other stakeholders in making educated judgements and decisions regarding a company’s previous performance, current situation, and future prospects.
Financial ratios are effective indicators of a company’s performance and financial health. They are the most powerful instruments for analysing and interpreting financial statements.
Financial ratios can be used to analyse trends and compare a company’s financial performance to that of competitors. In some circumstances, ratio analysis can help predict future trends.
However, determining the proper criterion against which a company’s ratio can be assessed is frequently a tough task for financial analysts (Igben, 2009). To address this issue, a firm’s financial ratio can be compared to the ratios of other firms in the same industry.
Financial ratios are an important instrument for evaluating a company entity’s performance and financial situations over time; empirical research such as Chen and Shimerda (1981) and Igben (2009) have proved their utility in this respect.
Chen and Shimerda (1980) captured the significance of accounting ratios when they claimed that financially challenged enterprises can be differentiated from non-failed firms in the years preceding the declaration of bankruptcy at an accurate rate of greater than 90% by evaluating financial ratios.
Financial ratios are tools for financial analysis. Financial ratio review is typically performed using financial data generated by the firm. However, financial ratios can be classed based on the information they provide.
The following ratios are commonly used: liquidity ratio, asset turnover ratio, financial leverage ratio, profitability ratio, and dividend policy ratio. The profitability ratio, which is the primary ratio used in this study as a measure of performance, can help determine the various levels of success of enterprises in creating profit.
The study’s goal is to use financial or accounting measures to measure the financial performance of commercial banks. It will also look at how liquidity, credit risk, capital, operating expenses, and bank size affect their financial performance.
1.2 Statement of Problem
The financial sector consists of strings of financial activities whose major end is profit making; over the years, the means and manner of measuring this financial performance remain an issue of concern;
the variables to use in the measurement of this performance are germane to growth and stability; the issue therefore is determining the variables to use in financial performance measurement and how well do these variables can measure the performance in the financial sector in The extent to which each of these variables and indicators measures performance over time is a source of concern and must be reviewed;
thus, the study’s focus is on determining the extent and effectiveness with which these variables measure performance in the banking business.
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