THE ROLE OF RATIO ANALYSIS IN BUSINESS DECISIONS (A CASE STUDY OF O. JACO BROS. ENT (NIG) LTD ABA, ABIA STATE)

ABSTRACT

 The objective of the study is to know the role of ratio analysis in business decisions, using O. Jaco Bros.Ent.(NIG) Ltd Aba, Abia state as a case study. Four research question and four hypotheses were employed. Survey design was considered appropriate for the study. The population of the study consists of 27 members of the management and staff of O. Jaco Bros, Ent. (NIG) LTD Aba,. Random sampling techniques were adopted to select 25 of them. The statistical tool used to analyses the data are tabulation, percentage and chi- square for test of hypothesis. It was found out that ratio analysis aids business decisions and facilitates proper understanding of information contained in it. other findings include that ratio analysis are useful in evaluating and predicting the performance and financial  position of a business, as well as identity, area that needs improvement , the implication of this findings is that as an investor or a manager, you are naturally interested in knowing how well the firm is doing in terms of profit making. It was therefore recommended that ratio analysis should be used with careful examination and proper understanding of the meaning, implication and effect of the actual figures shown in financial statements, in order to avoid making wrong judgments, conclusion and decisions.

CHAPTER ONE

• INTRODUCTION
  • BACKGROUND INFORMATION

The two primary objectives of every business are profitability and solvency. Profitability is the ability of a business to make profit, while solvency is the ability of a business to pay debts as they come due (Herman son et al, 1992: 824) How- ever, the achievement of these objectives requires  efficient management of resources of the business through planning, budgeting, for casting control, and decision- making. Also, the strengths and weakness of the business need to be identified and necessary corrective measures applied. Interestingly, accounting provides information that facilitates this function.

Basi8cally, accounting information measures and communication economic information needed for decision- making, Thus, the American Accounting Association (in Okezie, 2002:1) defined accounting as “the process of identifying, measuring and communicating economic information to permit  informed judgments and decision by the information” statement and balance sheet. The income statement shows the profitability or operational result of a business.

Although profits are often used as the basis for judging the performance of a business, such profit must be related to the various items of the financial useful for statement in order to be meaningful and useful for decision making furthermore, Owing to the summarized nature of financial statements, a lot of truths are hidden in them, thus, they need to be analyzed and interpreted by means of financial ratios to enable the users understand the meaning of the a solute amounts shown in them, and make informed business decisions.

In this regard, Essin (2006:144) observed.

Financial statements carry lots of financial information that are hidden in the figures, the figures in financial statements become more useful when they are related to each other or to some other relevant financial a data . Therefore users of financial information go a further steps to establish relationship (or ratios) among selected data in financial statements

According to Igben (1999:432) “Accounting (or financial) ratio is a proportion or fraction or percentage expressing the relationship between one item in a set financial statement. Accounting ratios are the most powerful of all tools used in analyzed and interpreting financial statements”. Therefore, ratio analysis involves taking stats of numbers (or Items) out of financial statements and forming ratios with them, to enhance informed judgments and decisions (lasher, 1997: 66).

Mcshane et al (2000: 336) defined decision making as “a concerns process of making choices among one or more alternatives with the interior of moving towards some desired stat5e of affairs”.

Therefore, business decisions can be defined as choice relating to the allocation and (or use of business resources to achieve business goals.

Decrsion- making calls information, Bittel et al. (1984:340) observed: ‘Managers are want information because they need to make decisions. The proper use of information is an important part of decision- making” Remarkably, one of the effective ways of providing information needed for decision- making is ratio analysis.

Yes, business dictions of make or buy investment or divestment, expansion or contractions capita organization and reconstruction, and so on cannot be properly made without the aid of financial strengths and weakness of a business, and highlight as pacts of a business requiring further investigation.

Therefore, this research is carried out to show ratio analysis help managers, shareholders, investors, creditors and other stakeholders make informed judgments and decision about the post performance present condition, and futures potentials of a business.

• STATEMENT OF PROBLEM

The problem of the study includes the following:

1. Using financial ratios to interpret and analysis information’s contained in the financial statements, to enable management understand them.
2. To identify the proper use of financial ratios and the roles ratio analysis plays in business decisions.
3. To educate users of financial statements about accounting ratios, and how it can be applied to financial statements.
   • OBJECTIVES OF THE STUDY

The main objective of this study is to examine the role of ratio analysis in business decisions using O. Jaco Bros Ent.(Nig).Ltd as a case study. Apart from the main objective, achieved are listed below. This includes:

1. To identify the usefulness of financial ratios in measuring and predicting the performance and financial position of a business.
2. To show how ratio analysis facilitates proper understanding of information contained in financial statements.
3. To know if ratio help to reveal the profit of an organization.
4. To know if ratio Analysis helps to access credit worthiness of an organization.

1.4 HYPOTHESIS OF THE STUDY

The statement of fact that relates to this research work are :

Ho: Ratio analysis is not useful in evaluating and predicting the performance of a business as well as intensifying areas that regret improvement.

Hi: ratio analysis is useful in evaluating and predicting the performance of a business well as intensifying areas that regret improvement.

Ho: Ratio analysis does not facilitate proper understanding of information contained in financial statement.

Ho: Ratio analysis does not help to reveal the profit of an organization.

Hi: Ratio analysis helps to reveal the profit of an organization.

Ho: Ratio analysis does not help management to access credit worthiness of an organization

Hi: Ratio analysis helps management to access credit worthiness of an organization.

• SIGNIFICANCE OF THE STUDY

The significance of this study is that on its completion, the following benefits will be derived.

1. The study will help the management of O. Jaco Bros. Ent. (Nig) Ltd. Aba and others to know how ratio analysis can help them understand the financial ratios contained in the financial statements and enhance their business decisions.
2. The finding of the research and the supportive reference materials will be of immense help to students of tertiary institutions and other researchers to investigate further in the area of study
3. It is hoped that the research will facilitate optimal business decisions when the recommendations are compiled with.
4. The study will encourage business men, investors, managers, and government authorities to appreciate quantitative techniques to like financial ratios when making economic and business decisions.
   • SCOPE OF THE STUDY

According to Akpankpan (2005:7) “Scope of the study is the limits or boundaries of the study. It is the areas covered by the researcher or extent the researcher would go. Limitations of the study are hindered areas or obstacles witnessed by the researcher in the course of the study which could influence his conclusions.

In view of the impossibility of covering every type of financial statement, this study is therefore restricted to the analysis of the income statement and the balance sheet by means of financial ratios: However, other analytical techniques such as horizontal analysis, vertical analysis and termed analysis would also be explained and illustrated.

Finally, although university ratio analysis is the core of the study, nevertheless, multivariate ratio analysis would be partly illustrated using  Dn Point. Equations.

• LIMITATION OF STUDY

In the course of this research work, the researcher was faced with same constraints which placed a limit in the ability and performance of the researcher. The researcher encountered the following constraints among others.

1. Insufficient Finance: The researcher needed a lot of money to travel as far as Aba to collect the necessary data from the firm under study. Money was also required to visit secondary data sources such as the internet libraries, professional bodies, and so on.
2. Lack of Co-operation: The un-co-operative attitudes of many employees of the firm under study were not encouraging, some of them were so biased and prejudiced that they did not care to understand the purpose of the research work. This resulted to their failure to provide sufficient information required for proper completion of the study.
3. Time Pressure: Time allowed was not enough for thorough completion of the research in consideration of the fact that we were also facing other academic studies during the semester.
   • DEFINITION OF TERMS USED IN THE STUDY

Accounting: The process of recording, summarizing, analyzing and interpreting financial (money related) activities to permit individuals and Organizations to make informed judgments and decisions. (Dansby et al, 2000: 1033).

Balance Sheet: A financial statement containing assets, liabilities, and owners equity or capital at a particular data or at the end of a particular period, to show the financial position of an organization (Akpkpan, 2002: 106).

Business: An activity enterprise or organization established to provide goods and services at a profit in order to satisfy human wants. (Ikon, 2004:2).

Business Decision: Choices made on matters relating to the allocation and/or use of business resources for makin, buying, selling, or supplying goods or services at a profit.

Decision Making: A mental process by which an individual or group of individual gather data and make a choice between two or more alternatives courses action (Ayandele 2005:3).

Financial Ratio: A proportion, Fraction, or percentage expressing the relationship between one item or set of financial statements and another item in the same financial statements (Igben, 1999:423).

Financial Statement: Quantitative information on the economic activities of an organization prepared to show the result and the financial position of the entity, often presented in terms of Balance sheet, Income statements, Finds flow statement, and so on.

Income Statement: A financial statement often referred to as the trading profit or loss account, matching revenues against expense to show the profitability or operational results of an enterprise over a period of time, such as a month or year. (Hermanson et al. 1992:25).

Ratio: A financial relationship of one number (or item) to another. (Density et al 2007:1047).

Ratio Analysis: A systematic review of accounting data by establishing relationships among various figures on the financial statements which bring together the results of the activities of a business. (Omuya, 1983:430).

Role: The degree to which somebody or something is involved in a situation or an activity and the effect that they have on it. (Horn by et al 2000:1021).

• BRIEF HISTORICAL BACKGROUND OF O.JACO ENT. (NIG). LTD. ABIA STATE

O.Jaco Bros Ent. (Nig)Ltd, Aba, Abia State was established in 1982. It started as a sole proprietorship business owned, runned, and managed by Nze Josephat Okolocha.

The Firm is a trading concern.

It specialized in sale, marketing, and distribution of various kinds of motorcycles, spare parts and electric generators.

At presents, the company has a total assets base of over #50 million and employs more than 30 workers. It has 6 branches 4 in Aba, 1 in Port Hartcourt, and in Ekwulobia (Anambra State).

The head office is located as 59, jubilee Road, Aba, Abia state, (which is the center focus of this study), has 4 departments: the sales and marketing department, the purchasing and supply department, the administration and personnel department and the finance and Accounts Department.

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Mcgraw Hill Book Company.

Dansby, Robert L. Burkun S. Kalisk: & Michael D. Lawrence. (2000). Paradigm Colledge Accounting. 4^th Ed. ST Paul, MN: Paradigm Publishing Inc.

Essien, Enefiok E (2006) Entrepreneurship: Concept and Practice Uyo: Abnaam Pub. Co Her Manson, Roger H, James Don Edward & Michael W. Maher, (1992).

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