Chapter One
INTRODUCTION
1.1 Background of the Study
Financial ratios are tools used to analyze financial conditions and performance. Financial analysis means different things to different people. Trade creditors are primarily interested in the liquidity of the firm being analyzed. Their claims are short-term and the ability of the firm to pay these can be judged by an analysis of its liquidity. On the other hand, the claims of bond holders are long term. They are interested in the cash flow of the firm to service debts over a long period of time. The bond holders may evaluate this analyzing the capital structures of the firm the major sources and users of fund, the firm’s profitability. Finally, an investor in a company’s common stock is concerned principally with present and expected future earning as well as the stability of these earning about a trend. As a result, the investor usually concentrates on analyzing the profitability of the firm (Financial ratios). The point of view of the analyst may be either external or internal. For external, it involves suppliers of capital while that of internal, the firm needs to undertake financial analysis, firm financial position and evaluation opportunities in relation of their effects on this position. With internal control, the managers are particularly concerned with return on investment in the various assets of the company and in the efficiency of assets management. Financial analysis involves the use of financial statement. These statement attempt to several things. They portray the assets and liabilities of a business firm at a moment in time usually at the end of the year. While balance sheet represents a snapshot of the firm’s statement of assets and liabilities at a moment in time, the income statement depicts its profitability over time.
1.2 Statement of the Problem
It has been shown that ratio analysis on its own does not always automatically rectify statement nor is the only parameter used in management decision making nor is it sufficient for interpreting company’s accounts. The study therefore, is faced with the problem of determining the extent to which financial ratio can assist management of any organization in interpreting company’s account and the extent to which management uses them in the decision making.
1.3 Objectives of the Study
The main aim of this study is to assess the usefulness of financial ratio analysis as a tool for enhancement of corporate investment decision Other Sub-Objectives Include:-
1. To ascertain whether the financial ratio enhance investment decision
2. To ascertain whether the financial ratio is an indicator of corporate health.
3. To assess the role of financial ratio in predicting the flow of investment from investors
1.4 Research Questions
1) Does the use of financial ratios enhance investment decision?
2) Is financial ratio an indicator of corporate health?
3) Does the role of financial ratio predict the flow of investment from investors?