THE USE OF FINANCIAL RATIOS FOR THE ASSESSMENT OF THE PERFORMANCE AND THE PROFITABILITY OF A FIRM

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY

The significance of Financial ratios and its analysis can not be over emphasized. According to Iloh (2011), a good financial planning for any functional organization has to be related to the existing strength and weakness of such organization. In the effort to discover the aforementioned factors, it becomes necessary to evaluate the performance of such organization over a given period. Financial Ration analysis is therefore one of the methods used in determining the level of performance of an organization. It can be explained as the techniques of reducing aggregate financial data into meaningful quotients, which are compared to other existing financial data. However, the researcher has developed interest in this particular topic in order find out the impact of financial ratio analysis, mostly to a lending banker. This is because, the issue of credit extension is not an easy task and is of technical in nature, one of the criteria for a successful lending is the review of the financial statements of a borrowing firm. This is actually carried out with help of ratio analysis. Furthermore, the analysis of such financial statements will enable a lending banker to access the viability of such borrowing firm, in the area of liquidity, profitability as well as the nature of its funding. Conclusively, having indepth knowledge of the above concepts mentioned above through Financial Ratio analysis, the lending banker will now be able to take appropriate decision on either to accept or reject a given loan proposal or request.

1.2    STATEMENT OF THE PROBLEM

The occurrence of loan default is becoming so alarming in most Nigeria Banks. This has affected most banks, specifically their capital adequacy, which invariably led to distress and failure. According to Orjih (2016), manipulation of accounting records by borrowers as well as inappropriate review and analysis of the financial statements of the borrower are among the causes of loan default and bad debt. That is, it creates room for the borrowers of fund to deviate from the terms of payment or repayment of fund borrowed from the lending banker. For several years, most banks have experienced distress and failure statements. Therefore, the researcher intends to financial out the necessary measure that could be adopted in order to remedy this urgly situation. Therefore, the researcher intends to find out the necessary measures that could be adopted in order to remedy this urgly situation.

1.3    PURPOSE/OBJECTIVE OF THE STUDY

The study of this research work (the use of Financial ratios for the assessments of the performance and profitability of a borrower by a lending banker) intends to achieve the following objectives:

· To identify the various classes of financial ratio as well as their importance

· To findout how these financial rations are used to assess the performance and profitability of an organization.

· To find out the impact of financial ratio analysis on a lending banker

· To identify the effect and incidence of poor or inappropriate review and analysis of the financial statements of a borrower.

· To find out who benefits from ratio analysis

1.4    SIGNIFICANCE OF THE STUDY

This subsection is associated with the usefulness of the study as well as who will benefit from this research work. Hence, this research work is of great significant as it deals with a study of the use of financial rations in assessing the performance and profitability of a firm. That is, it helps to know how viable a company or firm is. This research work will be beneficial to the following publics:

· The equity holder, it will enable them to assess the ability of firm to pay dividend and avoid bankruptcy.

· Short term creditors, it will enable them to assess the ability of firm to honour currently maturing financial obligations.

· Long term creditors, it will enable them to evaluate annual interest rate operational efficiency and earnings power of a firm over a period.

· The management, it will create room for internal control and efficient asset management.

· The customer/client, it will enable them to know the availability of product/service.

·  Tax authority, it also creates room for tax collection.

Finally, the lending bankers will see this research work as a guide to its lending operations. The review of this work will help to increase their knowledge on ratio analysis, which will help them to evaluate the strength and weakness of a borrowing firm in order to decide accepting or rejecting any given loan proposal.

1.6    DEFINITION OF TERMS

RATIO- A ratio is the indicated quotient of two mathematical expressions.

FINANCIAL RATIO ANALYSIS: This is one of the method used in determining the level of performance of an organization.

PROFITABILITY:  This implies the extent or level of profits, which a firm realized over a period of time.

BANK LENDING:  This is the extension of credits or funds to deficit hands who need fund for business expansion and other purposes.

LIQUIDITY: Liquidity entail the ability of a firm to meet its obligations as they become due.

BANK DISTRESS: A bank is declared distress when it is unable to meet the bank examination rating system know as CAMEL, or when it is not able to meet balance sheet test of having enough assets at market value to cover its liabilities

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