ABSTRACT
The study is aimed at finding
out the effects of financial analysis on investment decision. Using Dangote group
of companies (Dangote cement factory) as a case study. The area chosen for the study
was Dangote cement company at Gboko Benue state in Nigeria. Three research questions
guided the study. The objective of this study is to investigate the effect of ratio
analysis on expansion of existing business, to analyze the effect of ratio analysis
on establishment of a new business, assess the effect of ratio analysis on reducing
cost of replacement and modernization. The hypothesis to be tested is the null hypothesis
(H0); H01- Ratio analysis
has no significant effect on expansion of existing business, H02- Ratio analysis
has no significant effect on establishment of a new business, Ho3- Ratio analysis has no significant effect on reducing cost
of replacement and modernization in an organization. Anex-post factor research design
was adopted for the study. The instrument for data collection was gotten from secondary
data, after careful analysis using [E- Views Computation], it was found out that
ratio analysis contribute immensely to the business expansion, establishment of
new business and cost replacement and modernization. From the findings, it was concluded
that financial analysis performs a crucial role on investment decisions making and
organization performance which has been shown to be major force in investment decision
making. It was recommended, that every organization and manufacturing companies
should ensure that all material facts as regard the assets and equality of the organization
should be reflected in their yearly financial statement and experienced professionals
and workers such as accountants and auditors should be involved in financial analysis.
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF
STUDY
Financial
Statement Analysis is a method of reviewing and analyzing a company’s
accounting reports (financial statements) in order to gauge its past, present
or projected future performance. This process of reviewing the financial
statements allows for better economic decision making.
Globally,
publicly listed companies are required by law to file their financial
statements with the relevant authorities. For example, publicly listed firms in
America are required to submit their financial statements to the Securities and
Exchange Commission (SEC). Firms are also obligated to provide their financial
statements in the annual report that they share with their stakeholders. As
financial statements are prepared in order to meet requirements, the second
step in the process is to analyze them effectively so that future profitability
and cash flows canbe forecasted. Therefore, the main purpose of financial
statement analysis is to utilize information about the past performance of the
company in order to predict how it will fare in the future. Another important
purpose of the analysis of financial statements is to identify potential
problem areas and troubleshoot those problems.
There are
different users of financial statement analysis. These can be classified into
internal and external users. Internal users refer to the management of the
company who analyzes financial statements in order to make decisions related to
the operations of the company. On the other hand, external users do not
necessarily belong to the company but still hold some sort of financial
interest. These include owners, investors, creditors, government, employees,
customers, and the general public.The managers of the company use their
financial statement analysis to make intelligent decisions about their
performance. For instance, they may determine cost per distribution channel, or
how much cash they have left, from their accounting reports and make decisions
from these analysis results.
Small business
owners need financial information from their operations to determine whether
the business is profitable. It helps in making decisions like whether to
continue operating the business, whether to improve business strategies or
whether to give up on the business altogether.
People who have
purchased stock or shares in a company need financial information to analyze
the way the company is performing. They use financial statement analysis to
determine what to do with their investments in the company. So depending on how
the company is doing, they will either hold onto their stock, sell it or buy
more.
Creditors are
interested in knowing if a company will be able to honor its payments as they
become due. They use cash flow analysis of the company’s accounting records to
measure the company’s liquidity, or its ability to make short-term payments.
Governing and
regulating bodies of the state look at financial statement analysis to
determine how the economy is performing in general so they can plan their
financial and industrial policies. Tax authorities also analyze a company’s
statements to calculate the tax burden that the company has to pay. Employees
need to know if their employment is secure and if there is a possibility of a
pay raise. They want to be abreast of their company’s profitability and
stability. Employees may also be interested in knowing the company’s financial
position to see whether there may be plans for expansion and hence, career
prospects for them. Customers need to know about the ability of the company to
service its clients into the future. The need to know about the company’s
stability of operations is heightened if the customer (i.e. a distributor or
procurer of specialized products) is dependent wholly on the company for its
supplies.
Anyone in the
general public, like students, analysts and researchers, may be interested in
using a company’s financial statement analysis. They may wish to evaluate the
effects of the firm on the environment, or the economy or even the local
community. For instance, if the company is running corporate social responsibility
programs for improving the community, the public may want to be aware of the
future operations of the company.
Analysis of
financial statement is meant to be comprehensive and relevant just to mention a
few. To ensure that this is the case, there are two methods of financial
analysis; the horizontal analysis, vertical analysis trend analysis, ratio
analysis.
1.2
STATEMENT OF
PROBLEM
Manufacturing
companies have a nature that requires a great deal of record keeping based on
accounting principles and the ever changing accounting standards. It is clear
that proper analyses of financial statement are important in any organization.
Nevertheless, one can not dispute the fact that with each method of analysis
there is an underlying factor that hinders the comparability of records.Thus,
the problem at hand is the scheme of window dressing which an investor has to
be on the lookout for If he wants to make a good investment decision. Window
dressing is referred to as cosmetic financial reporting or creative accounting.
It is a situation whereby the financial statements are reported to deliberately
or intentionally falsify the accounts with the aim of overstating the
performance of a business. This could mislead a potential investor into a non
profitable investment decision. Proper financial analysis will open the eye of
not just the investor but also other users of such information. They will be
able to detect the loopholes and see a misleading financial statement for what
it is.
This study aims
at explaining the effects of financial statement analysis on investment
decision making in manufacturing industries. With that being said, it is
befitting to say that anything outside from a proper financial statement is a
problem to investors and users of accounting information. Thus window dressing
aims at destroying the essence of a proper financial statement, thereby making
room for unprofitable or unfavorable investment decision making.
1.3
OBJECTIVE OF
STUDY
The broad objective of his study is to
analyze the effect of financial analysis on investment decision.
Specific objectives are to;
·
Investigate
the effect of profitability ratioon expansion of existing business.
·
Analyze
the effect of profitability ratio on establishing of new business.
·
Assess
the effect of activities ratio on replacement and modernization.
1.4 RESEARCH QUESTIONS
I.
How does profitability ratio contribute to the
expansion of an existing business?
II.
What is the importance of profitability ratiotoward
the expansion of a new business
III.
How can activities ratio help in reducing cost of
replacement and modernization in an organization?
1.5 RESEARCH HYPOTHESIS
The hypothesis
to be tested is the null hypothesis (H0);
H01-profitability ratio has no
significant effect on expansion of existing business
H02-profitability ratio has no
significant effect on establishment of a new business
Ho3-activities ratio has no significant effect on reducing cost of
replacement and modernization in an organization.
1.6 SIGNIFICANCE OF STUDY
The need for the
study of financial analysis and investment decision in manufacturing companies
cannot be over emphasized. This study will benefit investors to help them know
if they are to buy more stock, retain the ones they have purchased or withdraw
from further investments. It will also benefit the creditors because through
financial analysis they are able to determine the cash flow of the firm in
order to know when to lend or when to ask for payment. It will also benefit the
government, especially at this time when businesses in the country are facing
hardship. Thus, more investment and development of funds are required to
stimulate the economy.
The study will
in turn benefit the general public, for example, researchers who want to
understand the concept of financial analysis. They can better understand the
use of each method of financial analysis and apply it to their work or for
further studies.
1.7 SCOPE OF STUDY
This
study is restricted to financial analysis and its contribution to investment
decision in manufacturing companies. The aspect to cover in this study is
relevant financial statements and how they are analyzed to serve its users.
This study has employed some prominent manufacturing industries in the country:
Dangote Group of Companies (Dangote cement factory). This study covers a period
of ten years (2010-2017) employing records from the company’s statement of
comprehensive income.
1.8 LIMITATION OF STUDY
Both financial
and time constraints were seriously encountered during this research.
Computational procedures of various accounting information or tools are outside
the scope of the work. However, those deemed necessary may be treated.
Honest efforts
are being made to have a worthwhile study with sufficient validity and
reliability. This work should not in any way be viewed as final solution to the
effect of financial analysis on investment decision making process in a
manufacturing industry. There are limitations on resources for reference
purposes.
Although there
were challenges during the course of this study the researcher was able to
overcome them through the financial contributions of family and resources were
made accessible by consultations with the supervisor. The internet remains a
great help in each aspect of difficulty.
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