AN EVALUATION OF CORPORATE

PERFORMANCE USING FINANCIAL RATIO

ANALYSIS: A STUDY OF FIRSTBANK OF
NIGERIA PLC MAKURDI BRANCH

TABLE OF
CONTENTS
Contents

Page

Title page

Certification

ii

Dedication

iv

Acknowledgement

Table of contents

vi

List of tables

ix

Abstract

CHAPTER ONE: INTRODUCTION

1.1

Background to the Study .

1.2

Statement of problem

1.3

Objectives of the study

1.4

Research Questions

1.5

Significance of Study

1.6

Scope and limitation of study

CHAPTER TWO: LITERATURE REVIEW

2.1

Introduction

2.2

Conceptual and Theoretical Framework of the Impact of Financial Ratio

Analysis on Corporate Performance

2.3

Basic financial statement

2.4

Types of ratios and their interpretations

2.5

Standard of Comparison

2.6

Uses of Financial Ratios

2.7

Limitations of Ratios Analysis

2.8

Empirical Review of Related Literature

CHAPTER THREE: RESEARCH METHODOLOGY

3.1

Introduction

3.2

Research design

3.3

Research Hypotheses

3.4

Population and Sampling plan

3.5

Source of relevant research data

3.6

Procedure for data collection

3.7

Data processing and analysis techniques

3.8

Model Specification

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND

INTERPRETATION
4.1

Introduction

4.2

Data presentation and analysis of data

4.2.1 Data Validity Test

4.3

Test of Research Hypothesis

4.4

Interpretation of Results

CHAPTER FIVE:

SUMMARY, CONCLUSIONS AND

RECOMMENDATIONS
5.1

Introduction

5.2

Summary

5.3

Conclusions

5.4

Recommendations

Bibliography
Appendix

vii

LIST OF TABLES
Table 4.1 Descriptive Statistics

37

Table 4.2 Regression Model Summary

38

Table 4.3: Regression Coefficient

38

ABSTRACT
This research study was conducted to show the evaluation of corporate
performance using financial ratio Analysis. Attention is paid to the identification of
different types of financial ratios, basic financial statement on which financial
ratios are applied, various standards of comparison and interpretation of financial
ratios. First Bank Nigeria Plc summary of Annual financial statement for the last
five years guided this study. Only secondary data was used for this study and were
analyzed using the ordinary least square multiple regression and descriptive
statistics. The findings of the study reveal that financial ratios have a significant
impact on the corporate performance of first bank Nigeria plc. The study
recommends that more ratio analysis techniques should be adopted to effectively
monitor corporate performance, improve profitability and increase organization
competitive advantage.

CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial Analysis is the summarizing of large quantities of financial data
for the purpose of evaluation and comparison of performance of a company over
time, its more or less the process of reducing a large amount of historical financial
data, taken from financial accounting statements, to a smaller set of information
more useful for decision making Archer (2009). This analysis is usually done
through the use of accounting ratios otherwise known as Financial Ratio.
American Institute of Certified Public Accountants defines Accounting as an
art of recording, classifying and summarizing in a significant manner and in terms
of money, transactions, events which are in part at least of financial characters and
interpreting the results thereof. Every firm communicates financial information and
operating performances to shareholders and other interested parties through its
financial statements and reports presented as annual reports.
Financial statements however show the financial position of the firms at a
particular point in time. It shows how funds invested in the firm have been utilized.
There are various parties that are interested in the performance of the firms such as
shareholders, debenture holders, investors, bank managers, financial journalists,

creditors, professional advisers, government, other competitors and

finally the public at large.
Ratio on the other hand is the relationship that one item bears to another, the
latter is known as the base and is divided by the former (Hawkings et al 2011).
Financial Ratios provide a means by which various items in the account are related
to an appropriate base usually the sale or the capital of a business. Analysis of rates
can disclose relationships as well as a basis for comparison which reveal condition
and trends that cannot be detected by inspection of the individual components of
the ratio and if they are properly interpreted, point the way to areas requiring
further investigation and enquiries.
The management, having the task of running a business efficiently will be
interested in all ratios. Managers naturally wish to compare their performance over
the past years with selected market and profitability objectives and with the
performance of competitors.
Basically, existing and future shareholders will be interested in investment
ratios, which indicate the level of return that can be expected on an investment in
the business. The investors wish to predict future dividends and changes in the
market price of the companys common stock. Since changes in both dividends and
prices are likely to be influenced by earnings, investors may seek to predict
earnings.

Banks and other financial institutions are also interested in the solvency of a
firm (i.e. ability to pay its debt). Short-term solvency is affected by the liquidity of
the companies, which is the companys state of possessing liquid assets such as,
cash and other assets that will soon be converted to cash. Since short-term debt
must be paid within the stipulated short time, liquid assets must be available for
their payment.
Long-term creditors are interested in a companys long term solvency, which
is usually determined by the relationship of a companys assets to its liabilities.
Generally, a company is considered solvent when its assets exceed its liabilities so
that the company has a positive shareholders equity. The larger the assets are in
relation to the liabilities, the greater the long term solvency of the company.
Ratio Analysis techniques help compares and interprets significant features
on financial statements. Its on the basis of this analysis that those interested in the
financial statement can get better insight about a firms strength and weakness.

1.2 STATEMENT OF PROBLEM

Although financial accounting statements shows the financial positions of a
business at the end of a financial period, but they do not present accurate
performance on the level of performance or efficiency of operations of a business
at the end of financial period.

It is usually observed that the operating profit figure of a company might be

higher in the current year than the previous year but this higher profit figure cannot
be used to say the company has performed better in the current year than in the
previous because the cost of the asset is being considered at the beginning of that
first year which may reduce the profit for that period. If it is judge based on this, it
will have adverse or negative impact on the investment or investors.
Many investors in Nigeria are uneducated or illiterate and as a result of
ignorance or inexperience, they cannot use or employ financial ratios in evaluating
the performance of the companies. Also existing shareholders use the cash
dividends and interest paid to them in evaluating the performance of the companies
for investment decision. These parameters do not give accurate information about
the performance and efficiency of operation of the companies.
Some managers do not employ financial ratios in performance appraisal and
in the evaluation of investment decision because of technicalities involved in
financial ratio analysis, fear of assessment and in experience. Therefore, they make
use of other alternatives instead of using financial ratios.
Because of all these problems, this research seek to empirically investigate
to what extent has financial ratios impacted on the evaluation of corporate
performance.

1.3 Objectives of the Study

The main objective of this study is to assess the use of financial ratio in
evaluating corporate performance of First Bank Nigeria plc.
The specific objectives of the study include:
i.

To examine the extent to which the use of current ratio has impacted on
corporate performance of First Bank Nigeria plc

ii.

To examine the extent to which the use of Acid test ratio has impacted on
corporate performance of First Bank Nigeria plc

iii.

To examine the extent to which the use of net profit margin ratio has
impacted on corporate performance of First Bank Nigeria plc

iv.

To examine the extent to which the use of return on investment has

impacted on corporate performance of First Bank Nigeria plc

v.

To examine the extent to which the use of earnings per share has
impacted on corporate performance of First Bank Nigeria plc

1.4 Research Questions

i.

To what extent has the use of current ratio influenced the evaluation of
corporate performance of First Bank Nigeria plc?

ii.

To what extent has the use of acid test ratio influenced the evaluation of
corporate performance of First Bank Nigeria plc?

iii.

To what extent has the use of net profit margin ratio influenced the
evaluation of corporate performance of First Bank Nigeria plc?

iv.

To what extent has the use of return on investment influenced the evaluation
of corporate performance of First Bank Nigeria plc?

v.

To what extent has the use of earnings per share influenced the evaluation of
corporate performance of First Bank Nigeria plc?

1.5 Significance of the Study

Basically, this study will expatiate and in greater details, the benefits that
can be derived from the application of financial ratio analysis as tool for
performance measurement.
It will help to highlight various areas of interest which includes profitability
trends and scope for improvement, solvency, ownership and control, financial
strength, borrowing potential, gearing and interest cover, dividend cover. It will
help the organization in measuring performance in the industry it operates.

1.6 Scope and Limitation of Study

The use of financial ratio in evaluating corporate performance is a broad
sphere of study in that, it covers a great expanse of time series since its
introduction to its present state, these observations are so numerous that a lot of

time and resources would be spent for any comparative and

comprehensive study to be undertaken in arriving at a reasonable conclusion.
Based on this fact, the scope of this research work will be limited to the
use of financial ratio in evaluating corporate performance of first bank
from 2007-2011.
This study deals mainly with the application of financial ratio for
measuring corporate performances. My computation is solely on financial
statements of company under review (First Bank of Nigeria Plc).
Furthermore, the problem of time shortage and insufficient funds
cannot be over looked. This has made me to limit my study to only one
company. However, effort shall be made to explore all the necessary units
within the departments in order to improve on previous work.

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