THE USE OF RATIO ANALYSIS IN EVALUATING BUSINESS PERFORMANCE IN BANK

THE USE OF RATIO ANALYSIS IN EVALUATING BUSINESS PERFORMANCE IN BANK

(A CASE STUDY OF FIRST BANK OF NIGERIA PLC)

ABSTRACT

Decision making in any organization as position correlation with organizational performance in term of profitability, which is one of the mot important objectives and direction of any organization. The research recognized some management tools (financial ratio) in companies the trends of performance of First Bank of Nigeria Plc for years by using profitability ratio. This research is divided into five chapters. Chapter one deals with the introduction, statement of the problems, scope and the significance of the study, however, each type of ratio analysis has a purpose of use that determine the different relationship emphasized in the analysis, for instance, the analysis may be for obtaining a bank loan, the bank will be interested in the interest in the firm short term or liquidity position management is however concerned with all financial ratio be it for the purpose of securing a loan or accessing long term profitability and investment decision.

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

Ratio measures the relationship between two or more variables and business can use ratio analysis to understand financial information better.

Financial statement such as balance sheet and profit and loss account shows a business financial performance or strength.

Absolute financial performance provides useful information about a business but in some situation, these absolute numbers are not very meaningful when interpreted in isolation.

In order to improve interpretation of financial performance and financial strength of a business. Accountant and analyst can use financial ratios to analyze financial information so that they get a better and deeper understanding of a business.

Ratio analysis is used for a better understanding. Absolute numbers are used but on their own they may not reveal much about business. For example, knowing that a company has made a profit of 1 million or that it made sales of N5 million may not be helpful in understanding how well a business has done or how the business is doing relative to competition. What ratios do is to express these numbers in relative terms such as gross profit margin, net profit margin or return. Ratios simply analyze and allow comparison to be made between two or more companies.

1.2    STATEMENT OF THE PROBLEMS

Nigeria undertook major financial sector reform starting in the 1994. The effects of these reforms on the profitability and cost and revenue efficiency of the banking sector are evaluated. The revenue performance of all banks and especially 1^st bank of Nigeria Plc. improved significantly, although costs also rose, and relative performance across banks did not coverage. (CBN Annual Report (2007).

1.3  OBJECTIVES OF THE STUDY

The purpose or objectives of this study includes the following:

1.     To present an overview of company as regards ratio analysis

2.     To evaluate the past performance and future performance of the companies

3.     To determine how companies can use its ratio analysis to improve on its business performance

1.4 RESEARCH HYPOTHESIS

Research hypothesis is a definite statement or ideal or suggestion whose truth or practicability can be tested through a scientific method. It is a tentative answer to a research question.

There are two types of hypothesis NULL hypothesis; is the process whereby the researcher state that there is no variables the null hypothesis of ‘’No’’ effect or no hypothesis difference.

Alternative hypothesis; is a possible condition not anticipation in the null hypothesis.

HYPOTHESIS I

Ho:  That the use of ratio analysis will not help to       improve on business performance

Hi:   That the use of ratio analysis will help to improve business performance.

HYPOTHESIS II

Ho: To evaluate the past performance and product of the future performance of the companies is not good.

Hi:   To evaluate the past performance of the companies is good.

HYPOTHESIS III

Ho:  The use of ratio analysis does not provide a precise information as the financial status/standing of the business

Hi:   The use of ratio analysis provides a precise information about the financial status/standing of the business

1.5  SIGNIFICANCE OF THE STUDY

This study will be significant in the following ways:

1.     It will give researcher a better understanding of the business performance, most especially First Bank of Nigeria Plc.

2.     It the employees of various business oriented organizations to know the importance of ratio analysis in business performance.

3.     It will enable policy makers appreciate the contributions of ratio analysis in evaluating the performance of business in Nigeria banks.

4.     It will enable graduates know the important role ratio analysis play in the performance of business

5.     It is equally relevant to the academic environment and also future researcher can always make reference to this research work for future research.

1.6  SCOPE OF THE STUDY

As the topic rightly suggest, the contributions of ratio analysis evaluating business performance of First Bank of Nigeria Plc. is a bit complex and wide considering the various types of ratios analysis operated in First Bank of Nigeria Plc. But, to make it clearer, this research work will only concentrate on First Bank and this will make it simple to take access to the material and information’s needed for the study.

1.7  LIMITATION AND CONSTRAINTS OF THE STUDY

The research work is worthwhile but the researcher encountered some constraints in the cause of carrying out the study, these includes:

1.     Difficulty in obtaining information from relevant bodies due to their non challant attitude

2.     Non availability of some information considered secret by the respondents

3.     Shortage of time in carrying out the study

4.     Inadequate textbooks and journals for the topic under study due to the ill-equip nature of the school library

5.     Financial constraints owing to the current economic challenges.

1.7  DEFINITION OF KEY TERMS

RATIO: Ratio is one number expressed in terms of another.

BANKS: Is an organization or financial institution where various monetary transactions are take place.

BUSINESS: Is the activity of buying, selling or supplying goods or services for money.

ANALYSIS: Is the detailed study of some things in order to understand more about it.

COMPARISON: Is the way of comparing two or more things

PERFORMANCE: The process of performing a task.

BALANCE SHEET: A writing statement showing the amount or money and property that a company has listing what has been received and paid out.

DECISION MAKING: Is the process of deciding about some thing, important, especially on an organization.

INTERPRETATION: Is the particular way in which something is understood or explained.

EQUITY RATIO: Is a financial ratio indicating the relative proportion of equity used to finance a companies assets.