24648682 evaluation-of-ratio-analysis-on-investment-decision-making
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EVALUATION OF
RATIO
ANALYSIS IN
INVESTMENT
DECISION
MAKING.
1
A CASE STUDY OF BLESSED OBIOMA ELECTRONICS NIG. LTD.BAYELSA
STATE.
BY
....................................................
(AKP/WRR/BMG/FIN/ND2007/0010)
A RESEARCH PROJECT WRITTEN IN THE DEPARTMENT
OF 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
APPROVAL
We the undersigned hereby certify that this project was
carried out by ..................... in the department of
accountancy, school of financial studies. We also certify that
the work is adequate in scope and quality in partial
fulfilment for the award of National Diploma (ND) in
accountancy .
Date
Project Supervisor
Center co-ordinator Date
3
DEDICATION
This project work is dedicated to the Almighty God who
gives wisdom for academic excellent, and to my beloved
parent who did not deprive me from benefiting and having
the light of education.
4
ACKNOWLEDGMENT
I am most grateful to the Almighty God for giving me life,
strength and courage to sail through my educational career
despite all odds and obstacles.
In writing this project, I am indebted to my people for their
contributions; support and encouragement in making this
project work a success.
I will like to use this opportunity to express my sincere
thanks to my parents, brothers and sisters, relatives, friends
and loved ones for their prayers, moral and financial support
through this program.
My profound gratitude goes to my Supervisor Mr
Emmanuel N. Bassey who despite his crowded schedule,
sacrificed time to read through the manuscript without
which this project would not have seen the light of the day.
My special thanks also goes to my beloved brothers, sisters,
uncles and others in the family for their advice,
encouragement and assistance.
5
In like manner, I wish to acknowledge the effort of all my
lecturers in accounting department for their principal
knowledge imparted on me during my period of study.
With special thanks to aunty, my beloved mum and dad for
their endless love shown to me during the course of my
studies.
Finally, thanks to others I cannot remember during the
course of the write up, may God reward every effort of
kindness and love shown during my academic pursuit.
ABSTRACT
6
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.
In this research work, the researcher is evaluation of ratio
analysis in investment decision making; a case study of
Blessed Obioma Electronics Nig. Ltd. The researcher will
consider in chapter one….the introduction of the study
which will in turn considers the following topics. The
background of the study, the statement of research
problem, the objective of the study, significance of the
study, the hypothesis and the structure of the work.
Chapter two focuses on the literature review; this chapter is
where the researcher extract materials from various books,
magazines, news papers and internet resources. In chapter
three, the researcher deals on research methodology while
chapter four is data analysis and interpretation. The finding,
summary and conclusion is in chapter five.
7
CHAPTER ONE
INTRODUCTION
1.1 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
8
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
company's 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.
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
9
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
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 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 10
a machine/ building or other asset, which will then yield
returns to an organisation over a period of time.
Key considerations in making investment decisions are:
1. What is the scale of the investment - can the
company afford it?
2. How long will it be before the investment starts to
yield 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
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.
11
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
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 company's activities, such
as the ratio between the company's current assets and
current liabilities or between its accounts receivable
and its annual sales. The basic source for these ratios is
12
the company's 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
company's performance relative to that of competitors
and are often used to trace performance over time.
Financial analysis can reveal much about a company
and its operations. However, there are several points to
keep in mind about ratios. First, a ratio is a "flag"
indicating areas of strength or weakness. One or even
several ratios might be misleading, but when combined
with other knowledge of a company's management and
economic circumstances, financial analysis can tell
much about a corporation. Second, there is no single
correct value for a ratio. The observation that the value
of a particular ratio is too high, too low, or just right
depends on the perspective of the analyst and on the
company's competitive strategy. Third, financial ratios 13
are meaningful only when compared with some
standard, such as an industry trend, ratio trend, a trend
for the specific company being analyzed, or a stated
management objective.
This research will be of great interest and benefit to the
following:
1. The manager and chief executives of the company
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
etc
1.5 LIMITATION OF THE STUDY14
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.
Individual differences in responses to questionnaire are
also a limitation encountered.
The Questionnaire method of primary data collection
was limited to the verbal responses of subjects to pre-
arrange questions. It also had limitation that its
usefulness depended on the level of education of the
subjects. There was the limitation of the problem of
memory in remembering past facts. The structured
nature of the questionnaire may compel the
respondents to give answers that they do not fully
endorse, There was the limitation of the rigidity of the
research instrument, which diminishes the amount of
information that could be gathered.
There was the limitation that the cost of administering
the questionnaire was very high due to high 15
administrative, personnel and traveling costs especially
when some of the respondents were initially not on
their seats. There was the limitation that the
researcher and the field data collectors were not
policemen and so they could not force some of the
respondents if they refuse to give answers. There was
also the limitation of the scarcity of time and money
resources.
In nutshell, we want to mellow down this point to the
following subtopics
Material Procurement
There was a lot constraints as to getting information
and materials for the job. The researcher made series
of consultations and visit to most renowned institutions
to acquire the needed information. Most materials used
were very difficult to come by, as there is no library
within the town.
Time Constraints
Combining academic work with job is no doubt a
thought provoking issue, as it has to do with time.
Actually, a lot of time was wasted as the researcher 16
visited the organizations and individuals together with
government agencies to obtain valuable information for
the project.
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.
17
HYPOTHESIS THUS:
1. Explain observed events in a systematic manner
2. Predict the outcome of events and relationships
3. Systematically summarized existing knowledge.
In essence, there exist NULL HYPOTHESIS set up only to
nullify the research hypothesis and the ALTERNATIVE
HYPOTHESIS for the purpose of the study. For the
efficiency of the study, the hypothesis is as follows:
NULL HYPOTHESIS (HO)
1. Investment is not the purchase or creation of
assets with the objective of making gains in the future.
2.` Ratio analysis is not primarily used to compare a
company's financial figures over a period of time.
ALTERNATIVE HYPOTHESIS
1. Investment is the purchase or creation of assets with
the objective of making gains in the future.
2. Ratio analysis is primarily used to compare a
company's financial figures over a period of time.
18
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
CHAPTER TWO
19
LITERATURE REVIEW
2.1 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
company's 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
when comparing ratios from one financial period to
20
another or when comparing the financial ratios of two
or more companies.
If you are making a comparative analysis of a
company's financial statements over a certain period of
time, make an appropriate allowance for any changes
in accounting policies that occurred during the same
time span.
When comparing your business with others in your
industry, allow for any material differences in
accounting policies between your company and
industry norms.
When comparing ratios from various fiscal periods or
companies, inquire about the types of accounting
policies used. Different accounting methods can result
in a wide variety of reported figures.
Determine whether ratios were calculated before or
after adjustments were made to the balance sheet or
income statement, such as non-recurring items and
inventory or pro forma adjustments. In many cases,
these adjustments can significantly affect the ratios.
Carefully examine any departures from industry norms. 21
Ratio Analysis is a useful tool in the following aspects:
Evaluation of Liquidity: The ability of a firm to meet
its 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.
Evaluation of Operating Efficiency: Ratios throw
light on the degree of efficiency in the management
and utilization of assets and resources. These are
indicated by activity or performance or turnover ratios
e.g. Stock Turnover Ratio, Debtors Turnover Ratio.
22
These indicate the ability of the firm to generate
revenue (sales) per rupee of investment in its assets.
Evaluation of Financial Strength: Long-term
solvency strength is indicated by Capital Structure
Ratios like Debt-Equity Ratio, Gearing Ratio, Leverage
Ratios etc. These ratios signify the effect of various
sources of finance e.g. debt, preference and equity.
They also show whether the firm is exposed to serious
financial strain or is justified in the use of debt funds.
Inter-firm and Intra-firm comparison: Comparison
of the firm’s ratios with the industry average will help
evaluate the firm’s position vis-à-vis the industry. It will
help in analyzing the firm’s strengths and weaknesses
and take corrective action. Trend Analysis 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
23
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
Assets or Return on Capital Employed may be very high
due to less investment in fixed assets. Ratios may not
indicate the true position in such situations.
(c) Product Line diversification: Detailed ratios for
different divisions, products and market segments etc.
may not be available to the users in order to make an
informed judgment. For example, loss in one product
24
may be set off by substantial profits in another product
line. But, the overall net profit ratio may be favorable.
(d) Impact of Seasonal Factors: When the
operations do not follow a uniform pattern during the
financial period, ratios may not indicate the correct
situation. For example, if the peak supply season of a
business is between Februarys to June, it will hold
substantial stocks on the balance sheet date. This will
lead to a very favorable current ratio on that date. But
the position for the rest of the year may be entirely
different.
(e) Differences in Accounting Policies: Different firms
follow different accounting policies, e.g. rate and
methods of depreciation. Straight-jacket comparison of
ratios may lead to misleading results.
(f) Lack of Standards: Even though some norms
can be set for ratios, there is no uniformity as to what
an “ideal” ratio is. Generally it is said that Current Ratio
should be 2:1. But if a firm supplies mainly to
Government Departments where debt collection period
25
is high, a Current Ratio of 4:1 or 5:1, may also be
considered 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 “good ratio”
and “bad ratio” is very thin.
(h) Interdependence: Financial Ratios cannot be
considered in isolation. Decision taken on the basis of
one ratio may be incorrect when a set of ratios are
analyzed.
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.
26
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
investment decision, a financing decision, and a
dividend decision.
The investment decision
Management must allocate limited resources between
competing opportunities ("projects") in a process
known as capital budgeting. Making this capital
allocation decision requires estimating the value of
27
each opportunity or project: a function of the size,
timing and predictability of future cash flows.
Project valuation
In general, each project's value will be estimated using
a discounted cash flow (DCF) valuation, and the
opportunity with the highest value, as measured by the
resultant 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 of the
incremental cash flows resulting from the project.
These future cash flows are then discounted to
determine their present value. These present values
are then summed, and this sum net of the initial
investment outlay is the NPV.
The NPV is greatly affected by the discount rate. Thus
identifying the proper discount rate—the project
"hurdle rate"—is critical to making the right decision.
The hurdle rate is the minimum acceptable return on
an investment—i.e. the project appropriate discount
rate. The hurdle rate should reflect the riskiness of the
investment, typically measured by volatility of cash 28
flows, and must take into account the financing mix.
Managers use models such as the CAPM or the APT to
estimate a discount rate appropriate for a particular
project, and use the weighted average cost of capital
(WACC) to reflect the financing mix selected. (A
common error in choosing a discount rate for a project
is to apply a WACC that applies to the entire firm. Such
an approach may not be appropriate where the risk of
a particular project differs markedly from that of the
firm's existing portfolio of assets.)
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 29
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
investment this year?" (and might be told N1 billion).
We can calculate the investment flow in a period as the
difference between the capital stock at the end of the
period and the capital stock at the beginning of the
period. Thus, the investment flow at time period t can
be defined as:
It = Kt - Kt-1
where Kt is the stock of capital at the end of period t
and 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 the
theory of capital? If all capital is circulating capital, so 30
that it is completely used up within a period, then no
capital built up during the previous period can be
brought over into next period. In this special case, the
theory of capital and the theory of investment become
one and the same thing.
With fixed capital, the story is different -- and more
complicated as there seems to be two decisions that
must be addressed: the amount of capital and the
amount of investment. These are different decisions.
One is about the desired level of capital stock. The
other is about the desired rate of investment flow. The
decisions governing one will inevitably affect the other,
but it is not necessarily the case that one is reducible
to the other.
There are effectively two ways of thinking about
investment. At the risk of annoying some people, we
shall refer to these as the "Hayekian" and "Keynesian"
perspectives. The Hayekian perspective conceives of
investment as the adjustment to equilibrium and thus
the optimal amount of investment is effectively a
decision on the optimal speed of adjustment. A firm 31
may decide it needs a factory (the "capital stock"
decision), but its decision on how fast to build it, how
much to spend each month building it, etc. --
effectively, the "investment" decision -- is a separate
consideration.
Naturally, the capital decision influences the
investment decision: a firm which has N 10 billion of
capital and decides that it needs N 15 billion of capital,
therefore requires investment of N 5 billion. But if this
adjustment can be done "instantly", then there is really
no actual investment decision to speak of. We just
change the capital stock automatically. The capital
decision governs everything.
32
CHAPTER THREE
RESEARCH METHODS AND PROCEDURES
3.1 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;
33
(ii) It is a method in which the researcher manipulates no
explanatory variables because they have already
occurred and so they cannot be manipulated;
(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
34
the workplace rather than an activated laboratory.
Data are got directly from the respondents. The
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
35
the sample of 100 respondents from each group of the
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
that:36
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
big number of individuals at the same time. Also with a
specific research budget, it is usually possible to cover
37
a broader area. The impersonal nature of a
questionnaire, its structure and standardized wording,
its order of question, its standardized instructions for
recording answers might make one to conclude that it
offers some uniformity from one measurement
occasion to another (Selltiz et al, 1976).
Another merit of questionnaire is that subjects may
have a bigger confidence in their anonymity, and thus
feel freer to express views they feel might be
disapproved.
Another attribute of the questionnaire that is
sometimes, though not always desirable is that it might
place less pressure on the subjects for immediate
response (Selltiz et al, 1976).
The questionnaire also has some demerits. It has noted
that for purpose of giving dependable responses to a
questionnaire, respondents must be considerably
educated. Thus one of the demerits of the usual
questionnaire is that it is appropriate only for with a
considerable amount of education. There is also
demerit that subject may be reluctant and unable.38
To report on the particular subject matter. Also, if a
subject misinterprets a question or give his or her
answer in a batting manner, there is often a little that
can be done to ameliorate the situation. In a
questionnaire, the information the researcher gets is
limited to the fixed alternative answer format, when a
specific answer is not available, it can lead to error
(Selltiz, 1976).
There is also limitation of memory in reporting on past
facts. The researcher is not a policeman that can
compel answers. That is, the information may not be
readily accessible to subject and thus the subject may
be reluctant to put forth enough alternative information
that he or she is only barely conscious of (Selltiz et al,
1996).
In this research project, a structured and undisguised
questionnaire is utilized which is made up of two parts
namely, the personal data section and the section on
the data on the actual subject matter of the work. The
questionnaire was undisguised in the sense that the
purpose of the data collection which was to collect
39
primary data for writing up the researcher’s ND project
was made know to the 200 respondents. The
questionnaire was structured in the sense the
questions are logically sequenced and are to be asked
to the respondents in the same manner and no follow
up questions are to be allowed. Some of the questions
are 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 for
the respondents to tick.
The structured questionnaire has the merit that it
yields data that is easier to analysis than data
produced by an unstructured questionnaire. Also the
structured nature diminishes both researcher’s and
research instrument biases. It however has the demerit
that the rigidity of the research instrument diminishes
the amount of information that could be got.
Interview
The method of communication of the research
instrument is by means of the personal interview. The
40
method has the merit that it produces a better sample
of the population than either mail or the telephone
methods. It also has the merit that it gives a very high
completion and response rates. It has the merit that
the interview has a bigger sensitively
misunderstandings by the respondents and gives a
chance for clarification of misunderstood questions. It
has the merit that it is a very feasible method (Selltiz et
al, 1976). The personal interview method has the
demerit that it is more costly than the mail or the
telephone methods of communication of a
questionnaire.
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
41
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
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 just
before the title.
42
(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
better depicted by a table; and
A table is more concise and takes up a less space than
a prose formation:
The data is to be analysed by means of percentage,
cross tabulation and the chi-square test of population
proportions for testing the two hypothesis. Percentages
express the ratio of two sets of data to a common base
of 100. The researcher made use of the computer
program called SPSS (statistical package for social
science) to carry out the computation of the hypothesis
testing.43
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 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.
44
Apart from the heading above, the other headings in this chapter
include:
Data Presentation,
Percentage analysis
Cross-tabulated analysis
Hypothesis testing
4.2 DATA PRESENTATION
TABLE 4.1
THE SUMMARY OF THE PERSONAL DATA OF THE RESPONDENTS
45
1
2
3
4
SEX
Male
Female
Total
Marital Status
Married
Single
Total
AGE
21-30 years
31-40 years
41-50 years
51-60 years
Total
HIGHER
EDUCATIONAL
QUALIFICATION
DIPLOMA
OND
HND
FIRST DEGREE
SECOND DEGREE
NIM
TOTAL
FREQUENCY
150
50
200
130
70
200
90
90
10
10
200
10
30
80
20
40
20
200
Angles
subtended
in degree
18
54
144
36
72
36
360
The marital statuses of the 200 respondents it is found that 130 of them
are married while 70 of them are single. For the ages of the 200
respondents they are 21-30 years, 31-40 years, 40-50 years, 51-60 years
with frequency of 90,10 respectively. For the educational qualification of
46
160
140
120
100
80
60
40
20
0
-
-
-
-
-
-
-
-
-
MAIL FEMALE
Frequency
Gender
the 200 respondents they are diploma, OND, HND, First Degree, 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 of the
respondents.
FIGURE 4.1: THE SIMPLE BAR CHART OF THE DATA ON THE SEX OF THE RESPONDENTS
GENDER OF THE RESPONDENTS
TABLE 2. GENDER OF THE RESPONDENTS
47
Frequency percentage Valid Percent
Cumulative Percent
MAIL 150 75.0 75.0 75.0
FEMALE 50 25.0 25.0 100.0
Total 200 100.0 100.0
140
120
100
80
60
40
20
0
-
-
-
-
-
-
-
-
MARRIED SINGLE
Frequency
Marital status
Source: from data in table 1 (generated from SPSS) statistical package for social science.
From figure 4.1 above, it is shown that male respondents have the
modal frequency of 150 out of the 200 respondents while the female
respondents have the frequency of 50 of them.
Figure 4.2 below shows the simple bar chart of the data on the marital
statuses of the respondents.
FIGURE 4.2: THE SIMPLE BAR CHART OF THE DATA ON THE MARITAL STATUSES OF THE RESPONDENTS
TABLE 4.3. MARITAL STATUS OF THE RESPONDENTS
48
Status frequency Percentage Valid Percent
Cumulative Percent
MARRIED 130 65.0 65.0 65.0
SINGLE 70 35.0 35.0 100.0
Total 200 100.0 100.0
020406080
100
1.02.0 3.0 4.0
Frequency
Age group
From figure 4.2 above, it is shown that the married respondents have
the modal frequency of 130 out of the 200 respondents while the
single respondents have the frequency of 70 of them.
FIGURE 4.3: THE HISTOGRAM OF THE DATA ON THE AGES OF THE RESPONDENTS.
AGES OF THE RESPONDENTS
TABLE 4. AGES OF THE RESPONDENTS
Categories
(years)
Frequency Percentage Valid
Percentage
Cumulative
Percent
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
49
15%5%
10%
80%
10%
20%
FIRST DEGREE
ONDDIPLOMA
FIRST DEGREEOND
SECOND DEGREE
HND
SOURCE: From the data in Table 1.
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.
FIG.4.4 THE PIE CHART OF THE DATA ON THE HIGHEST EDUCATIONAL QUALIFICATIONS OF THE 200 RESPONDENTS
50
TABLE 4. 5 EDUCATIONAL QUALIFICATION OF THE RESPONDENTS
DIPLOMA OND HND FIRST DEGREE SECOND DEGREE NIM Total
Investment is the purchase or creation or assets With the objective e of making gains in the future
YES NO DON’T KNOW
NOANSWER
Total
61960 -3121
100
2
3110
43
2
9
11
2
7
9
39
12 19
91
263121
200
939
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
51
Educational level
Frequency Percentage Valid Percentage
Cumulative Percentage
DIPLOMA 10 5.0 5.0 5.0
OND 30 15.0 15.0 20.0
HND 80 40.0 40.0 60.0
FIRST DEGREE 20 10.0 10.0 70.0
SECOND DEGREE 40 20.0 20.0 90.0
NIM 20 10.0 10.0 100.0
Total 200 100.0 100.0
DIPLOMA 10 10 OND 1919 HND 14 30 47 91 FIRST DEGREE 10 9 19 SECOND DEGREE 40 40 NIM 21 21Total 104 40 47 9 200
Ratio analysis is primarily used to compare a company’sFinancial figures over a period of time
YES NO DON’TKNOW
NOANSWER Total
The above table shows that the total of 100
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.
TABLE 7. Cross-tabulation 2
52
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
true. The procedure, which enables the researcher to
design on the basis, is sample regards whether a
hypothesis is true or not is called test of hypothesis or
test of significance.
The null hypothesis asserts that there is no significant
difference between the statistics and the population
parameters and what ever is observed difference is
there, is merely due to fluctuations in sampling from
the same population. Null hypothesis is thereby
denoted by the symbol H0. Any hypothesis, which
contradicts the H0, is called an alternate hypothesis
53
and is denoted by the symbol H1. The researcher used
chi-square analysis.
CHI-SQUARE TEST
The c is one of the simplest and most widely used non-
parametric test in statistical work. It makes no
assumptions about the population being sampled. The
quantity c describes the magnitude of discrepancy
between theory and observation i.e. with the help of c
test we can know whether a given discrepancy
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 frequency
54
4.5 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
this automated data analysis it has minimized the
researcher’s time constraints and reduced human error
and 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
F
Expected
F
Residual Decision
YES
NO
DON’T
KNOW
NO
ANSWER
100
43
39
18
50.0
50.0
50.0
50.0
50.0
-7.0
-11.0
-32.0
Accept
Reject
Reject
Reject
55
Total 200
Chi-Square Test (2)
Ratio analysis is primarily used to compare a company’s financial figure over a period of time.
Residuals
The observed value of the dependent variable minus
the value predicated by the regression equation, for
each case. Large absolute values for the residuals
56
Observed
F
Expected
F
Residual Decision
YES
NO
DON’T
KNOW
NO
ANSWER
Total
104
40
47
9
200
50.0
50.0
50.0
50.0
54.0
-10.0
-3.0
-41.0
Accepted
Rejected
Rejected
Rejected
indicate that the observed values are very different
from the predicted values.
SOURCE: From the questionnaires administered.
The formulated hypothesis that is subject to
statistical test is at 5% level of significance in
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.
57
TEST STATISTICS
note: df = degree of freedom
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
58
Investment is the purchase or creation
of assets with the objective of making gains in the future.
Ratio analysis is primarily used to compare a company’s financial figure over a period of time.
Chi-Square
df
73.880
3
94.120
3
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.
CHAPTER FIVE
FINDINGS, SUMMARY AND CONCLUSION
5.1 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 59
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
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
60
purchase a machine/ building or other asset, which will
then yield returns to an organisation over a period of
time.
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.
61
62