CHAPTER ONE
INTRODUCTION
1.1
CHAPTER ONE
INTRODUCTION
CHAPTER ONE
CHAPTER ONE
INTRODUCTION
BACKGROUND
OF THE STUDY
The significance of Financial ratios and
its analysis can not be over emphasized. According to Iloh (2001), 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 indept 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 occurance 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 (1996), 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.
1.5 LIMITATION
OF THE STUDY
According to Orjih (1999), limitations of
the study are those constraints facing a researcher such as time, events,
people, etc. therefore, the researcher will not forget to state the problems
that confronted her in the course of carrying out this research work. The
constraints include: finance, time, people attitudes towards the release of
related materials for the study and many other factors.
1.6 DEFINITION
OF TERMS
RATIO- A ratio is the indicated quotient
of two mathematical expressions.
FINANCIAL
RATIO ANALAYSIS: 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.