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24648682 evaluation-of-ratio-analysis-on-investment-decision-making

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24648682 evaluation-of-ratio-analysis-on-investment-decision-making

  1. 1. EVALUATION OF RATIO ANALYSIS IN INVESTMENT DECISION MAKING. 1
  2. 2. A CASE STUDY OF BLESSED OBIOMA ELECTRONICS NIG. LTD.BAYELSA STATE. BY .................................................... (AKP/WRR/BMG/FIN/ND2007/0010)A RESEARCH PROJECT WRITTEN IN THE DEPARTMENTOF ACCOUNTANCY, SCHOOL OF FINANCIAL STUDIES. COLLEGE OF ACCOUNTANCY AND COMPUTER TECHNOLOGY, SUBMITTED IN PARTIAL FULFILMENT FOR THE AWARD OF NATIONAL DIPLOMA (ND) IN ACCOUNTANCY. NOVEMBER 2009 2
  3. 3. APPROVALWe the undersigned hereby certify that this project wascarried out by ..................... in the department ofaccountancy, school of financial studies. We also certify thatthe work is adequate in scope and quality in partialfulfilment for the award of National Diploma (ND) inaccountancy . DateProject SupervisorCenter co-ordinator Date 3
  4. 4. DEDICATIONThis project work is dedicated to the Almighty God whogives wisdom for academic excellent, and to my belovedparent who did not deprive me from benefiting and havingthe light of education. 4
  5. 5. ACKNOWLEDGMENTI am most grateful to the Almighty God for giving me life,strength and courage to sail through my educational careerdespite all odds and obstacles.In writing this project, I am indebted to my people for theircontributions; support and encouragement in making thisproject work a success.I will like to use this opportunity to express my sincerethanks to my parents, brothers and sisters, relatives, friendsand loved ones for their prayers, moral and financial supportthrough this program.My profound gratitude goes to my Supervisor MrEmmanuel N. Bassey who despite his crowded schedule,sacrificed time to read through the manuscript withoutwhich this project would not have seen the light of the day.My special thanks also goes to my beloved brothers, sisters, 5
  6. 6. uncles and others in the family for their advice,encouragement and assistance.In like manner, I wish to acknowledge the effort of all mylecturers in accounting department for their principalknowledge imparted on me during my period of study.With special thanks to aunty, my beloved mum and dad fortheir endless love shown to me during the course of mystudies.Finally, thanks to others I cannot remember during thecourse of the write up, may God reward every effort ofkindness and love shown during my academic pursuit. 6
  7. 7. ABSTRACTRatios are highly essential profit tools in financial analysisthat help financial analysts implement plans that improveprofitability, liquidity, financial structure, reordering,leverage, and interest coverage. Although ratios reportmostly on past performances, they can be predictive too,and provide lead indications of potential problem areas.In this research work, the researcher is evaluation of ratioanalysis in investment decision making; a case study ofBlessed Obioma Electronics Nig. Ltd. The researcher willconsider in chapter one….the introduction of the study whichwill in turn considers the following topics. The background ofthe study, the statement of research problem, the objectiveof the study, significance of the study, the hypothesis andthe structure of the work.Chapter two focuses on the literature review; this chapter is 7
  8. 8. where the researcher extract materials from various books,magazines, news papers and internet resources. In chapterthree, the researcher deals on research methodology whilechapter four is data analysis and interpretation. The finding,summary and conclusion is in chapter five. 8
  9. 9. CHAPTER ONE INTRODUCTION1.1 THE BACKGROUND OF THE STUDY One of the most important long term decisions for any business relates to investment. Investment is the purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources to purchase a machine/ building or other asset, which will then yield returns to an organisation over a period of time. Ratio analysis is primarily used to compare a companys financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry. 9
  10. 10. 1.2 STATEMENT OF THE PROBLEM Making big investment decisions means that we must allocate substantial amounts of major resources of people, time, technology, intellectual capital, and, of course, money. A high-quality decision process requires that our choices are doable and well formulated, that consequences are understood and well explored, that our preferences are included when comparing the full array of costs and benefits of the proposed decisions, and that any actions we take are focused on getting results. We want the best decisions to be made for any and all investment opportunities: research & development investments to improve existing technology as well as create technical breakthroughs that lead to new products and services capital investments in new manufacturing plants and equipment, timed to coincide with market trends 10
  11. 11. marketing investments in the growth of both existing and new businesses human resource investments in new talent and better organizational structures.One of the most important long term decisions for anybusiness relates to investment. Investment is thepurchase or creation of assets with the objective ofmaking gains in the future. Typically investmentinvolves using financial resources to purchase amachine/ building or other asset, which will then yieldreturns to an organisation over a period of time.Key considerations in making investment decisions are:1. What is the scale of the investment - can thecompany afford it?2. How long will it be before the investment starts toyield returns?3. How long will it take to pay back the investment?4. What are the expected profits from the investment?5. Could the money that is being ploughed into the 11
  12. 12. investment yield higher returns elsewhere?1.3 OBJECTIVE OF THE STUDY The main objective is evaluation of ratio analysis in investment decision making. The subsidiary objective is Determine Capital investment decisions Apply ratio analysis to determine the strengths and weakness of the firm. An understanding of the importance of capital budgeting in marketing decision making An explanation of the different types of investment project An introduction to the economic evaluation of investment proposals The importance of the concept and calculation of net present value and internal rate of return in decision making The advantages and disadvantages of the payback method as a technique for initial screening of two or more competing projects 12
  13. 13. 1.4 SIGNIFICANCE OF THE STUDY In assessing the significance of various financial data for effective investment decision, experts engage in financial analysis, the process of determining and evaluating financial ratios. A ratio is a relationship that indicates something about a companys activities, such as the ratio between the companys current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the companys financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only meaningful when compared with other financial information. Since they are most often compared with industry data, ratios help an individual understand a companys performance relative to that of competitors and are often used to trace performance over time. 13
  14. 14. Financial analysis can reveal much about a companyand its operations. However, there are several pointsto keep in mind about ratios. First, a ratio is a "flag"indicating areas of strength or weakness. One or evenseveral ratios might be misleading, but when combinedwith other knowledge of a companys management andeconomic circumstances, financial analysis can tellmuch about a corporation. Second, there is no singlecorrect value for a ratio. The observation that the valueof a particular ratio is too high, too low, or just rightdepends on the perspective of the analyst and on thecompanys competitive strategy. Third, financial ratiosare meaningful only when compared with somestandard, such as an industry trend, ratio trend, atrend for the specific company being analyzed, or astated management objective.This research will be of great interest and benefit to thefollowing:1. The manager and chief executives of the company 14
  15. 15. under consideration. 2. Producers, intermediaries, as well as management, organizations/firms. 3. The students of marketing, accounting and business administration. 4. Likewise to aspiring businessmen and entrepreneur. 5. The diverse group of people and the dynamic marketing partners as well as the society at large. The diversified group of people above, must know how to adapt to the marketing strategies, new technologies etc1.5 LIMITATION OF THE STUDY This work was carried out under a tight schedule of school pressure and work load which makes it absolutely necessary to devote limited time to do it, having sleepless night etc. Another problem encountered is finance, the cost of transportation in carrying out the investigation. 15
  16. 16. Individual differences in responses to questionnaire arealso a limitation encountered.The Questionnaire method of primary data collectionwas limited to the verbal responses of subjects to pre-arrange questions. It also had limitation that itsusefulness depended on the level of education of thesubjects. There was the limitation of the problem ofmemory in remembering past facts. The structurednature of the questionnaire may compel therespondents to give answers that they do not fullyendorse, There was the limitation of the rigidity of theresearch instrument, which diminishes the amount ofinformation that could be gathered.There was the limitation that the cost of administeringthe questionnaire was very high due to highadministrative, personnel and traveling costs especiallywhen some of the respondents were initially not ontheir seats. There was the limitation that theresearcher and the field data collectors were notpolicemen and so they could not force some of the 16
  17. 17. respondents if they refuse to give answers. There wasalso the limitation of the scarcity of time and moneyresources.In nutshell, we want to mellow down this point to thefollowing subtopicsMaterial ProcurementThere was a lot constraints as to getting informationand materials for the job. The researcher made seriesof consultations and visit to most renowned institutionsto acquire the needed information. Most materials usedwere very difficult to come by, as there is no librarywithin the town.Time ConstraintsCombining academic work with job is no doubt athought provoking issue, as it has to do with time.Actually, a lot of time was wasted as the researchervisited the organizations and individuals together withgovernment agencies to obtain valuable information forthe project. 17
  18. 18. Financial Constraints The researcher would have obtained more information than what is obtainable here but due to lack of money to visit some of the firms and government agencies located a bit farther from the researcher place of resident.1.6 HYPOTHESIS It is a conjectural statement of the relationships between two or more variables. It is testable, tentative problem explanation of the relationship between two or more variables that create a state of affairs or phenomenon. E,C, Osuola (1986 page 48) said hypothesis should always be in declarative sentence form, and they should relate to them generally or specially variable to variables. HYPOTHESIS THUS: 1. Explain observed events in a systematic manner 18
  19. 19. 2. Predict the outcome of events and relationships3. Systematically summarized existing knowledge.In essence, there exist NULL HYPOTHESIS set up onlyto nullify the research hypothesis and theALTERNATIVE HYPOTHESIS for the purpose of thestudy. For the efficiency of the study, the hypothesis isas follows:NULL HYPOTHESIS (HO)1. Investment is not the purchase or creation ofassets with the objective of making gains in the future.2.` Ratio analysis is not primarily used to compare acompanys financial figures over a period of time.ALTERNATIVE HYPOTHESIS1. Investment is the purchase or creation of assetswith the objective of making gains in the future.2. Ratio analysis is primarily used to compare acompanys financial figures over a period of time. 19
  20. 20. 17 STRUCTURE OF WORK This research work is to be organized in five chapters as follows: 1. Introduction 2. Literature Review 3. Research Methods and Producers 4. Data presentation and Analysis 5. Findings, Summary and Conclusion 20
  21. 21. CHAPTER TWO LITERATURE REVIEW2.1 THE SCENARIO OF RATIO ANALYSIS Ratios are highly essential profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Ratio analysis is primarily used to compare a companys financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry. There are several considerations you must be aware of 21
  22. 22. when comparing ratios from one financial period toanother or when comparing the financial ratios of twoor more companies.If you are making a comparative analysis of acompanys financial statements over a certain period oftime, make an appropriate allowance for any changesin accounting policies that occurred during the sametime span.When comparing your business with others in yourindustry, allow for any material differences inaccounting policies between your company andindustry norms.When comparing ratios from various fiscal periods orcompanies, inquire about the types of accountingpolicies used. Different accounting methods can resultin a wide variety of reported figures.Determine whether ratios were calculated before orafter adjustments were made to the balance sheet orincome statement, such as non-recurring items and 22
  23. 23. inventory or pro forma adjustments. In many cases,these adjustments can significantly affect the ratios.Carefully examine any departures from industry norms.Ratio Analysis is a useful tool in the followingaspects: Evaluation of Liquidity: The ability of a firm to meetits short term payment commitments is called liquidity.Current Ratio and Quick Ratio help to assets the short-term solvency (liquidity) of the firm. Evaluation of Profitability: Profitability ratios i.e. Gross Profit Ratio, Operating Profit Ratio, Net Profit Ratio are basic indicators of the profitability of the firm. In addition, various profitability indicators like Return on Capital Employed (ROCE), Earnings per share (EPS), Return on Assets (ROA) etc. are used to assess the financial performance. 23
  24. 24. Evaluation of Operating Efficiency: Ratios throwlight on the degree of efficiency in the managementand utilization of assets and resources. These areindicated by activity or performance or turnover ratiose.g. Stock Turnover Ratio, Debtors Turnover Ratio.These indicate the ability of the firm to generaterevenue (sales) per rupee of investment in its assets.Evaluation of Financial Strength: Long-termsolvency strength is indicated by Capital StructureRatios like Debt-Equity Ratio, Gearing Ratio, LeverageRatios etc. These ratios signify the effect of varioussources of finance e.g. debt, preference and equity.They also show whether the firm is exposed to seriousfinancial strain or is justified in the use of debt funds.Inter-firm and Intra-firm comparison: Comparisonof the firm’s ratios with the industry average will helpevaluate the firm’s position vis-à-vis the industry. Itwill help in analyzing the firm’s strengths andweaknesses and take corrective action. Trend Analysis 24
  25. 25. of ratios over a period of years will indicate the direction of the firm’s financial policies. Budgeting: Ratios are not mere post-modern of operations. They help in depicting future financial positions. Ratios have predictor value and are helpful in planning and forecasting the business activities of a firm for future periods, e.g. estimation of working capital requirements.2.2 LIMITATION OF RATIO ANALYSIS (a) Window Dressing: Ratios depict the picture of performance at a particular point of time. Sometimes, a business can make year-end adjustments in order to result in favorable ratios (e.g. current ratio, operating profit ratio, debt-equity ratio etc.) (b) Impact of Inflation: Financial Statements are affected by inflation. Ratios may not depict the correct picture. For example, fixed assets are accounted at historical cost while profits are measured in current rupee terms. In inflationary situations, the Return on 25
  26. 26. Assets or Return on Capital Employed may be veryhigh due to less investment in fixed assets. Ratios maynot indicate the true position in such situations.(c) Product Line diversification: Detailed ratios fordifferent divisions, products and market segments etc.may not be available to the users in order to make aninformed judgment. For example, loss in one productmay be set off by substantial profits in another productline. But, the overall net profit ratio may be favorable.(d) Impact of Seasonal Factors: When theoperations do not follow a uniform pattern during thefinancial period, ratios may not indicate the correctsituation. For example, if the peak supply season of abusiness is between Februarys to June, it will holdsubstantial stocks on the balance sheet date. This willlead to a very favorable current ratio on that date. Butthe position for the rest of the year may be entirelydifferent.(e) Differences in Accounting Policies: Different 26
  27. 27. firms follow different accounting policies, e.g. rate andmethods of depreciation. Straight-jacket comparison ofratios may lead to misleading results.(f) Lack of Standards: Even though some normscan be set for ratios, there is no uniformity as to whatan ―ideal‖ ratio is. Generally it is said that CurrentRatio should be 2:1. But if a firm supplies mainly toGovernment Departments where debt collection periodis high, a Current Ratio of 4:1 or 5:1, may also beconsidered normal.(g) High or Low: A number by itself cannot be―high‖ or ―low‖. Hence, a ratio by itself cannot become―good‖ or ―bad‖. The line of difference between ―goodratio‖ and ―bad ratio‖ is very thin.(h) Interdependence: Financial Ratios cannot beconsidered in isolation. Decision taken on the basis ofone ratio may be incorrect when a set of ratios areanalyzed. 27
  28. 28. From the above discussion, it is felt that, the ratio is a measuring device to judge the growth, development and present condition of a concern. Further, it is found that, Each and every ratio indicates the financial position as well as it is also helpful for taking several management decisions for the future period effectively and efficiently.2.3 CAPITAL INVESTMENT DECISIONS Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management return excess cash to shareholders. Capital investment decisions thus comprise an 28
  29. 29. investment decision, a financing decision, and adividend decision.The investment decisionManagement must allocate limited resources betweencompeting opportunities ("projects") in a processknown as capital budgeting. Making this capitalallocation decision requires estimating the value ofeach opportunity or project: a function of the size,timing and predictability of future cash flows.Project valuationIn general, each projects value will be estimated usinga discounted cash flow (DCF) valuation, and theopportunity with the highest value, as measured by theresultant net present value (NPV) will be selected(applied to Corporate Finance by Joel Dean in 1951.This requires estimating the size and timing of all ofthe incremental cash flows resulting from the project.These future cash flows are then discounted todetermine their present value. These present values 29
  30. 30. are then summed, and this sum net of the initialinvestment outlay is the NPV.The NPV is greatly affected by the discount rate. Thusidentifying the proper discount rate—the project"hurdle rate"—is critical to making the right decision.The hurdle rate is the minimum acceptable return onan investment—i.e. the project appropriate discountrate. The hurdle rate should reflect the riskiness of theinvestment, typically measured by volatility of cashflows, and must take into account the financing mix.Managers use models such as the CAPM or the APT toestimate a discount rate appropriate for a particularproject, and use the weighted average cost of capital(WACC) to reflect the financing mix selected. (Acommon error in choosing a discount rate for a projectis to apply a WACC that applies to the entire firm. Suchan approach may not be appropriate where the risk ofa particular project differs markedly from that of thefirms existing portfolio of assets.) 30
  31. 31. In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance. These are visible from the DCF and include discounted payback period, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI.2.4 CAPITAL VERSUS INVESTMENT What is investment? Strictly speaking, investment is the change in capital stock during a period. Consequently, unlike capital, investment is a flow term and not a stock term. This means that while capital is measured at a point in time, while investment can only be measured over a period of time. If we ask "what is capital right now?", we might get an answer along the lines of N10 trillion. But if we ask "what is investment right now?", this cannot be answered. The quantity of a flow always depends on the period in consideration. Thus, we can answer "what is investment this month?" (and might be told it is N10 million) or "what is 31
  32. 32. investment this year?" (and might be told N1 billion).We can calculate the investment flow in a period as thedifference between the capital stock at the end of theperiod and the capital stock at the beginning of theperiod. Thus, the investment flow at time period t canbe defined as:It = Kt - Kt-1where Kt is the stock of capital at the end of period tand Kt-1 is the stock of capital at the end of period t-1(and thus at the beginning of period t).How is the theory of investment different from thetheory of capital? If all capital is circulating capital, sothat it is completely used up within a period, then nocapital built up during the previous period can bebrought over into next period. In this special case, thetheory of capital and the theory of investment becomeone and the same thing.With fixed capital, the story is different -- and more 32
  33. 33. complicated as there seems to be two decisions thatmust be addressed: the amount of capital and theamount of investment. These are different decisions.One is about the desired level of capital stock. Theother is about the desired rate of investment flow. Thedecisions governing one will inevitably affect the other,but it is not necessarily the case that one is reducibleto the other.There are effectively two ways of thinking aboutinvestment. At the risk of annoying some people, weshall refer to these as the "Hayekian" and "Keynesian"perspectives. The Hayekian perspective conceives ofinvestment as the adjustment to equilibrium and thusthe optimal amount of investment is effectively adecision on the optimal speed of adjustment. A firmmay decide it needs a factory (the "capital stock"decision), but its decision on how fast to build it, howmuch to spend each month building it, etc. --effectively, the "investment" decision -- is a separate 33
  34. 34. consideration.Naturally, the capital decision influences theinvestment decision: a firm which has N 10 billion ofcapital and decides that it needs N 15 billion of capital,therefore requires investment of N 5 billion. But if thisadjustment can be done "instantly", then there is reallyno actual investment decision to speak of. We justchange the capital stock automatically. The capitaldecision governs everything. 34
  35. 35. CHAPTER THREE RESEARCH METHODS AND PROCEDURES3.1 RESEARCH DESIGN The research method selected for the study is a combination of a survey and an industrial study. The survey research method is described hereunder that:(i) It is a design in which primary data is gathered from members of the sample that represents a specific population;(ii) It is a design in which a structure and systematic research instrument like a questionnaire or an interview schedule is utilized together with the primary data;(ii) It is a method in which the researcher manipulates no explanatory variables because they have already occurred and so they cannot be manipulated; 35
  36. 36. (iii) Data are got directly from the subjects; The subjects give the data the natural settings of their workplaces;(iv) The answers of the respondents are assumed to be largely unaffected of the content in which they are brought;(v) The impacts of the confounding factors are ―controlled‖ statistically; and(vi) The aim of the research may span from the exploration phenomena to hypotheses testing (stone 1995). The survey research method has some merit, which are to be articulated hereunder: In the survey research method, the sample of the respondents are selected in such a way as to make it low due to the utilization of big sample sizes, which results in generally low sample errors. The survey research method also has the merit that data collection takes place in the ―natural‖ settings of the workplace rather than an activated laboratory. Data are got directly from the respondents. The 36
  37. 37. advantage that the survey yields data that suggests new hypothesis is very illuminating. There is also the merit that a set of systematic data collection instruments such as questionnaire interview schedules and observation gadgets can either be used alone or in conjunction with other instruments (stone, 1995).3.2 Sampling Spiegel (1992) observes that sampling theory is a study of the relationship existing between a population or universe and the samples drawn from it. The population in this study is from the senior junior staff of the firms. In order to make conclusions of sample theory and statistical references to be valid, a sample must be selected as to be representative of the population (Spiegel,1992). One way in which a representative sample may be got, is by the process of stratified random sampling. In this research work, the technique of simple random sampling is used to select the sample of 100 respondents from each group of the 37
  38. 38. personnel, making a total sample size of 200. The list of all senior and junior staff of the firm is from the personnel department of the company. The numbers were written on a piece of paper, put in a basket and the papers were folded to cover the numbers and one of the pieces of paper was selected at a time without replacing it and any name corresponding to the number becomes a number of the sample. This method of sampling without replacement was done until the sample of 100 respondents per group of personnel was arrived at.3.3 Population The population, in this study is the totality of the senior and junior staff of Blessed Obiono Electroniocs Nig. Ltd. Bayelsa State. The sample size is 200 and this number of respondents was chosen from the population. The rationale for studying a sample rather than the population includes 38
  39. 39. that:1. Most empirical research work in the social science involves studying a sample in place of the population. 2. Statistical Laws reveal that statistics composed from the sample data are usually reasonably accurate. 3. Luckily, it is usually possible to estimate the level of confidence that can be placed on the results. We should note that above is only possible if the probability sample size is large enough.3.4 Data Collection Questionnaire As earlier stated, the primary data collection instrument in this study is the questionnaire. In the questionnaire method of primary data collection, heavy dependence is placed on verbal reports from the subjects to get information on the earnings per share and standard set. The questionnaire has a lot of merits. It needs less skill to administer. Questionnaire can be administered to a 39
  40. 40. big number of individuals at the same time. Also with aspecific research budget, it is usually possible to covera broader area. The impersonal nature of aquestionnaire, its structure and standardized wording,its order of question, its standardized instructions forrecording answers might make one to conclude that itoffers some uniformity from one measurementoccasion to another (Selltiz et al, 1976).Another merit of questionnaire is that subjects mayhave a bigger confidence in their anonymity, and thusfeel freer to express views they feel might bedisapproved.Another attribute of the questionnaire that issometimes, though not always desirable is that it mightplace less pressure on the subjects for immediateresponse (Selltiz et al, 1976).The questionnaire also has some demerits. It has notedthat for purpose of giving dependable responses to aquestionnaire, respondents must be considerably 40
  41. 41. educated. Thus one of the demerits of the usualquestionnaire is that it is appropriate only for with aconsiderable amount of education. There is alsodemerit that subject may be reluctant and unable.To report on the particular subject matter. Also, if asubject misinterprets a question or give his or heranswer in a batting manner, there is often a little thatcan be done to ameliorate the situation. In aquestionnaire, the information the researcher gets islimited to the fixed alternative answer format, when aspecific answer is not available, it can lead to error(Selltiz, 1976).There is also limitation of memory in reporting on pastfacts. The researcher is not a policeman that cancompel answers. That is, the information may not bereadily accessible to subject and thus the subject maybe reluctant to put forth enough alternative informationthat he or she is only barely conscious of (Selltiz et al,1996). 41
  42. 42. In this research project, a structured and undisguisedquestionnaire is utilized which is made up of two partsnamely, the personal data section and the section onthe data on the actual subject matter of the work. Thequestionnaire was undisguised in the sense that thepurpose of the data collection which was to collectprimary data for writing up the researcher’s ND projectwas made know to the 200 respondents. Thequestionnaire was structured in the sense thequestions are logically sequenced and are to be askedto the respondents in the same manner and no followup questions are to be allowed. Some of the questionsare of the fixed alternative answer format type.Ten (10) of the questions have yes or no answers,Ten (10) of the questions have alternative answer forthe respondents to tick.The structured questionnaire has the merit that ityields data that is easier to analysis than dataproduced by an unstructured questionnaire. Also the 42
  43. 43. structured nature diminishes both researcher’s andresearch instrument biases. It however has the demeritthat the rigidity of the research instrument diminishesthe amount of information that could be got.InterviewThe method of communication of the researchinstrument is by means of the personal interview. Themethod has the merit that it produces a better sampleof the population than either mail or the telephonemethods. It also has the merit that it gives a very highcompletion and response rates. It has the merit thatthe interview has a bigger sensitivelymisunderstandings by the respondents and gives achance for clarification of misunderstood questions. Ithas the merit that it is a very feasible method (Selltizet al, 1976). The personal interview method has thedemerit that it is more costly than the mail or thetelephone methods of communication of aquestionnaire. 43
  44. 44. Observations In addition to questionnaire and face-to face interviews, observation was also carried out. This was to enable the researcher to witness by herself the officers of this firm and to interact with these people.3.5 Field Work The researcher and three other field data collectors did the fieldwork. The field data collectors were other classmates also offering the full-time ND program, who have also offered research methodology. They had no problem gaining entrance into the office under consideration since one of them has a friend working there. They were to be trained by the researcher on how to greet the respondents and how to tick the questionnaire correctly and honestly.3.6 Description of Data Presentation and Analysis Tools The data presentation tools are simple bar charts, histograms, and pictorial tables. The most important 44
  45. 45. parts of a table include;(a) Table numbers(b) Title of the table(c) Caption(d) Stub or the designation of the rows and columns(e) The body of the table.(f) The head note or prefatory note or explanatory justbefore the title.(g) Source note, which refers to the literally or scientific source of the table (Mills and Walter 1995) Anyiwe (1994) has observed that a table has the following merits over a prose information that;(f) A table ensure an easy location of the required figure;(g) Comparisons are easily made utilizing a table than a prose information;(h) Patterns or trends within the figures which cannot be visualized in the prose information can be revealed and 45
  46. 46. better depicted by a table; andA table is more concise and takes up a less space thana prose formation:The data is to be analysed by means of percentage,cross tabulation and the chi-square test of populationproportions for testing the two hypothesis. Percentagesexpress the ratio of two sets of data to a common baseof 100. The researcher made use of the computerprogram called SPSS (statistical package for socialscience) to carry out the computation of the hypothesistesting. 46
  47. 47. CHAPTER FOUR DATA PRESENTATION AND ANALYSIS4.1 INTRODUCTION In the previous chapter, the research methods and procedures have been handled. In this chapter the data presentation and analysis are to be done. The data is to be presented by means of tables, two simple bar charts, one histogram and one pie chart to make it amenable for further analysis. By analysis is meant the act of noting relationship and aggregating the set of variables with similar attributes and also breaking the unit of their components (Mills and Walters 1995). In this research work, the research accepts the contention of Podsakoff and Dalton (1995) that the factual information from the data can be used as a basis for reasoning, calculation and discussion. Apart from the heading above, the other headings in this chapter include: Data Presentation, Percentage analysis Cross-tabulated analysis Hypothesis testing 47
  48. 48. 4.2 DATA PRESENTATION TABLE 4.1 THE SUMMARY OF THE PERSONAL DATA OF THE RESPONDENTS 1 SEX FREQUENCY Male 150 Female 50 Angles Total 200 Marital Status subtended 2 in degree Married 130 Single 70 Total 200 AGE 21-30 years 90 3 31-40 years 90 41-50 years 10 51-60 years 10 Total 200 HIGHER EDUCATIONAL QUALIFICATION 4 DIPLOMA 10 18 OND 30 54 HND 80 144 FIRST DEGREE 20 36 SECOND DEGREE 40 72 NIM 20 36 TOTAL 200 360 48
  49. 49. The marital statuses of the 200 respondents it is found that 130 of themare married while 70 of them are single. For the ages of the 200respondents they are 21-30 years, 31-40 years, 40-50 years, 51-60years with frequency of 90,10 respectively. For the educationalqualification of the 200 respondents they are diploma, OND, HND, FirstDegree, Second Degree, NIM. and they have frequencies of 10, 30, 80,20, 40 and 20 respectively.Figure 4.1 below shows the simple bar chart of the data on the sex ofthe respondents. FIGURE 4.1: THE SIMPLE BAR CHART OF THE DATA ON THE SEX OF THE RESPONDENTS GENDER OF THE RESPONDENTS 160- 140- Frequency 120- - - 100- - - 80 MAIL FEMALE Gender 60 40 49 20 -
  50. 50. TABLE 2. GENDER OF THE RESPONDENTS Frequency percentage Valid Cumulative Percent Percent MAIL 150 75.0 75.0 75.0FEMALE 50 25.0 25.0 100.0Total 200 100.0 100.0Source: from data in table 1 (generated from SPSS) statisticalpackage for social science.From figure 4.1 above, it is shown that male respondents have themodal frequency of 150 out of the 200 respondents while the femalerespondents have the frequency of 50 of them.Figure 4.2 below shows the simple bar chart of the data on the maritalstatuses of the respondents.FIGURE 4.2: THE SIMPLE BAR CHART OF THE DATA ON THE MARITALSTATUSES OF THE RESPONDENTS 140 - - 120 - - Frequency 100 - - 80 - - 60 MARRIED SINGLE Marital status 40 20 50 0
  51. 51. TABLE 4.3. MARITAL STATUS OF THE RESPONDENTSStatus frequency Percentage Valid Cumulative Percent PercentMARRIED 130 65.0 65.0 65.0SINGLE 70 35.0 35.0 100.0 Total 200 100.0 100.0From figure 4.2 above, it is shown that the married respondents havethe modal frequency of 130 out of the 200 respondents while thesingle respondents have the frequency of 70 of them.FIGURE 4.3: THE HISTOGRAM OF THE DATA ON THE AGES OF THERESPONDENTS. AGES OF THE RESPONDENTS 100 80 60 40 Frequency 20 0 1.0 2.0 3.0 4.0 Age group 51
  52. 52. TABLE 4. AGES OF THE RESPONDENTSCategories Frequency Percentage Valid Cumulative Percent(years) Percentage 21 TO 30 90 45.0 45.0 45.0 31 TO 40 90 45.0 45.0 90.0 41 TO 50 10 5.0 5.0 95.0 SOURCE: From the data in Table 1. 51 TO 60 10 5.0 5.0 100.0 Total 200 100.0 100.0 From figure 4.3 above, it is shown that the age classes limit are 20.5-30.5 years, 30.5-40.5 years, 40.5-50.5 years and 50.5-60.5 years with frequencies of 90, 90, 10, and 10 out of 200 respectively. This shows that this is bi-modal distribution as the age classes of 20.5- 30.5 years and 30. 5-40.5 years have a frequency of 10. Figure 4.4 below shows the pie chart of the data on the highest educational qualifications of the 200 respondents. 52
  53. 53. FIG.4.4 THE PIE CHART OF THE DATA ON THE HIGHEST EDUCATIONAL QUALIFICATIONS OF THE 200 RESPONDENTS OND DIPLOMA 5% FIRST DEGREE 15% 10% OND SECOND DEGREE 20% 80% 10% HND FIRST DEGREE TABLE 4. 5 EDUCATIONAL QUALIFICATION OF THE RESPONDENTSEducational Frequency Percentage Valid Cumulative level Percentage Percentage DIPLOMA 10 5.0 5.0 5.0 OND 30 15.0 15.0 20.0 HND 80 40.0 40.0 60.0FIRST DEGREE 20 10.0 10.0 70.0 SECOND 40 20.0 20.0 90.0 DEGREE NIM 20 10.0 10.0 100.0 Total 200 100.0 100.0 53
  54. 54. SOURCE: from the data in table 1. From figure 4.4 above, the Educational Qualifications are Diploma, O.N.D, First Degree, Second Degree and NIM and the subtended angles in degrees are equal to 180, 540, 1440, 360, 720 and 360 and respectively at the center of the circle.4.3 CROSS-TABULATED ANALYSIS Table bellow show the analysis of the statuses of the 200 respondents TABLE 6. CROSS- TABULATION 1 Investment is the purchase or creation or assets With the objective e of making gains in the future Total DON’T NO YES NO ANSWER KNOW DIPLOMA 6 2 2 12 2 OND 19 19 HND 91 FIRST 60 31 DEGREE - 10 9 7 26 SECOND 31 DEGREE 31 21 21 NIM 100 43 11 9 200 Total The above table shows that the total of 100 39 939 respondents (out of 200 said YES. This proved that investment is the purchase or creation of assets with the objective of making gains in the future. 54
  55. 55. TABLE 7. Cross-tabulation 2 Ratio analysis is primarily used to compare a company’s Financial figures over a period of time NO YES NO DON’T ANSWER Total KNOW DIPLOMA 10 10 OND 19 19 HND 14 30 47 91 FIRST DEGREE 10 9 19 SECOND DEGREE 40 40 NIM 21 21 Total 104 40 47 9 200 The above table indicates that ratio analysis is not primarily used to compare a company’s financial figures over a period of time. 104 respondents out of 200 said yes. While 40 did not agree with the fact.4.4 HYPOTHESIS TESTING In attempting to arrive at decisions about the population, on the basis of sample information, it is necessary to make assumptions or guesses about the population parameter involved. Such an assumption is called statistical hypothesis, which may or may not be 55
  56. 56. true. The procedure, which enables the researcher todesign on the basis, is sample regards whether ahypothesis is true or not is called test of hypothesis ortest of significance.The null hypothesis asserts that there is no significantdifference between the statistics and the populationparameters and what ever is observed difference isthere, is merely due to fluctuations in sampling fromthe same population. Null hypothesis is therebydenoted by the symbol H0. Any hypothesis, whichcontradicts the H0, is called an alternate hypothesisand is denoted by the symbol H1. The researcher usedchi-square analysis.CHI-SQUARE TESTThe c is one of the simplest and most widely used non-parametric test in statistical work. It makes noassumptions about the population being sampled. Thequantity c describes the magnitude of discrepancybetween theory and observation i.e. with the help of ctest we can know whether a given discrepancy 56
  57. 57. between theory and observation can be attributed to chance or whether it results from the inadequacy of the theory to fit the observed facts. If c is zero, it means that the observed and expected frequencies completely coincide. The greater the value of c the greater will be the discrepancy between observed and expected frequencies. The formula for computing chi-square is – c = (O-E)2/E Where,O=Observed frequency E=Expected or theoretical frequency4.5 SOFTWARE USED FOR DATA ANALYSIS: For the data analysis and the interpretation, the researcher has adopted advanced version of SPSS (statistical package for social science). This application software has facilitated the researcher to construct the frequency table, various types of charts and to find out the valid percentage responses from the sample. By 57
  58. 58. this automated data analysis it has minimized theresearcher’s time constraints and reduced human errorand gives also accurate outlay of information.Chi-Square Test (1)Investment is the purchase or creation of assets with the objective of making gains in the future. Observed Expected Residual Decision F F YES 100 50.0 50.0 Accept NO 43 50.0 -7.0 Reject DON’T KNOW 39 50.0 -11.0 Reject NO 50.0 ANSWER 18 -32.0 Reject Total 200 58
  59. 59. Chi-Square Test (2) Ratio analysis is primarily used to compare a company’s financial figure over a period of time. Observed Expected Residual Decision F FYES 104 50.0 54.0 AcceptedNO 40 50.0 -10.0 RejectedDON’TKNOW 47 50.0 -3.0 RejectedNOANSWER 9 50.0 -41.0 RejectedTotal 200ResidualsThe observed value of the dependent variable minusthe value predicated by the regression equation, foreach case. Large absolute values for the residualsindicate that the observed values are very differentfrom the predicted values.SOURCE: From the questionnaires administered.The formulated hypothesis that is subject tostatistical test is at 5% level of significance in 59
  60. 60. testing hypothesis, the calculated value of the test statistics is usually compared with tables of value. The critical values of the test statistics serve as criterion value. It afforded the basis for rejecting the null hypothesis is a function of the value of the tested statistic. Reject the null hypothesis if the calculated value of the test statistic is greater than the critical value. Accept the null hypothesis if the calculated value of the test statistic is less than the critical value. TEST STATISTICS Ratio analysis is primarily used to Investment is the compare a purchase or creation company’s of assets with the financial figure objective of making over a period of gains in the future. time.Chi-Square 73.880 94.120df 3 3 note: df = degree of freedom 60
  61. 61. 4.6 SUMMARY OF RESULT Level of significance……….0.05 Critical value………………………43.0 Calculated value……………………73.880 From the above analysis, it could be seen that in the first test, Investment is the purchase or creation of assets with the objective of making gains in the future. the calculated value is greater than the critical value so we reject the hypothesis. In the second test which state that Ratio analysis is primarily used to compare a company’s financial figure over a period of time. , the level of significance is 0.05, the critical value is 44 while the calculated value from the test statistics table is 94.120. Looking the data above, it shows very clear that the calculated value is greater than the critical value so we reject the hypothesis. 61
  62. 62. CHAPTER FIVE FINDINGS, SUMMARY AND CONCLUSION5.1 FINDINGS Through this research work, the researcher was able to discover that Ratios are means for presenting numerical relationships between items or groups of items. A ratio is determined by dividing one item in a relationship with the other. Generally, financial ratios are computed from financial statements and so ratios developed for an analysis of a firm’s performance and financial position are subject to the same limitations, which are present in the accounting statements themselves. Ratios are used in the analysis of financial 62
  63. 63. statements of a business in order to reveal underlying economic trends in its activities and to discover its STRENGTHS AND WEAKNESSES as compared with the trends of sister companies. Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Making big investment decisions means that we must allocate substantial amounts of major resources of people, time, technology, intellectual capital, and, of course, money.5.2 SUMMARY Investment is the purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources to purchase a machine/ building or other asset, which will then yield returns to an organisation over a period of time. 63
  64. 64. 5.3 CONCLUSION Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management return excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision. A positive investment decision can only be taken the application of ratio analysis. 64
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