Ratio Analysis As A Tool For Performance Evaluation
RATIO ANALYSIS AS A TOOL FOR PERFORMANCE EVALUATION
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Ratio has been most important tools for the effective development of manufacturing companies and industries, the major uses of ratio is toaccess the profitability, gearing, liquidity and asset turnover of the company. The introduction of ratio analysis in manufacturing company has brought about a turn around in many industry and companies.
The important ofÂ ratio analysis in the running of any manufacturing cannot be over emphasizes, it is this significant role that led to the believe. That ratio is the life blood ofÂ every manufacturing companies and industries.
1.1 BACKGROUND TO THE STUDY
The primary objectives of a company being in existence is to make profit. Although this is not only objective. It nevertheless remains an extremely important yardstick used in determining the long run survival of most companies.
Therefore it is necessary to be also to access whether or not a company has performed well over a period of time. This and loss account, but compared with the amount of money invested in the business? are they equivalent to the level earned by major competitors? We need to know whether or not the company is in a healthy short term financial position for long-term expansion. We need to know the answer to these and many other questions. However, it is difficult to access how well a firm or company is doing by merely examining the Naira amount reported for individual items in the financial statement.
â€œFinancial statements, in their raw formsÂ hold little or no meaning to theÂ user. The figures contained there is have to be converted to ratios in order to ensure easy analysis, ratios are not theÂ end but a means to an end. They ensures analyst ask the right questionâ€ (Adeyeye and fajembola 1998 page 21).
According to Ajayi (1998 page 42), financial analysis is the process of identifying the financial strength and weaknesses of a firm by property establishing relationships between items of the balance sheet and the profit and loss account.
Olowe (1997 pg 239) says financial ration analysis is the relationship between financial data in the financial statement to aid the financial condition and performance of a firm. The analysis will give an analyst a better insight into the understanding of the financial statements that would be obtained by examining the financial data alone.
Ratio analysis is a powerful tool for financial analysis a ratio is defined by Pandey (1999 pg 109) as theindicated quotient to two mathematical expressions and also as the relationship between two or more things
Because of its flexibility, financial ratio can be used to analyse all forms of business ownership irrespective of their sizes and figures; the analysis can be carried into all aspects of the operations of manufacturing industries.
In view of thus this research work examined ratio analysis as an effective tools for performance evaluation in a manufacturing industry.
1.2 STATEMENT OF THE PROBLEM
The financial state and the results of operations of business enterprises are of interest to various groups including the management, shareholders, creditors. The government, employees customers, financial analysts and advisers, potential shareholders, competitors etc. the principal statements together with supplementary statement present much of basic information needed to make sound economic decisions regarding the business enterprise.
Most of the items in the financial statement when considered individually, do not give any serious meaning so there is the need of finding an effective tool of evaluating the performance of the company operations.
Hence, the adoption of ratio analysis as a tool for performance evaluation and the research is conducted on the Glaxosmithkline consumer Plc to ascertain whether truly or not analysis is an effective tool for evaluating the performance of manufacturing industries.
1.3 OBJECTIVE OF THE STUDY
The main objective of carrying out this study is to evaluate the financial statement and performance of Glaxosmithkline consumer Plc for the last five years so as to reveal it financial strength and weaknesses and the causes, which have contributed thereto. The specific objectives are to appraise the company capital structure and its leverage.
To evaluate ratio analysis as a tool for measuring the performance of manufacturing industries.
To help users of financial statement know the extent to which ratio analysisÂ evaluates performance in an organization
To analysis the company solvency, inÂ relating to current assets and current liabilities and theÂ breakdownÂ of these measures to show the effect of cash flow, inventory change and movements in debtors and creditors.
To assess the company in terms ofÂ value toÂ investorsÂ ratios dealing with this area includes PE (Price/earnings) ratio dividend yield and other such investment criteria.
And lastly, to open another angle toÂ ratio analysisÂ an which future researchers can exploreÂ and hence, further an areaÂ not covered by the present researchÂ work.
1.4 RESEARCH HYPOTHESIS
An hypothesis is a preparation or principles which assumed perhaps without belief in other to draw its logical consequences and also by method to test its accord with fact, which are know or may be determine.
An hypothesis is a conjecturalÂ statement of the relationship between two or more variables. Hypothesis are always in declarative sentence. Form and they relate either generally or specifically variable to variables.
A good accounting ratios gives a proper accounting record and effective informal control. In view of this study, the researcher formulate Null hypothesis (Ho) and Alternate hypothesis (Hi) to test the research work.
Null hypothesis (Ho): RatioÂ analysis are not significant in performance evaluation.
Alternative hypothesis (HI): RatioÂ analysis areÂ significant in performance evaluation.
1.5 SIGNIFICANCE OF THE STUDY
In this present time when companies are going bankrupt and getting liquidated, this research work would provide a substantial information to manufacturing industries on how ratio analysis helps in measuring and evaluating their performance which the study is also justified in the following ways,
It would enlighten theÂ researcherâ€™s audience on the usage of financial ratio in assessing a companyâ€™s performance.
It is equally expectedÂ that prospective investors with little or no accounting knowledge would be able to criticallyÂ evaluate the financial statement of organizations, which are of interest to them when carrying out investment decisions.
Finally, future researchers in similar field wouldÂ find this research work useful,Â as it could be a reference for their study.
1.6 SCOPE OF THE STUDY
The study is basically on the impact of ratio analysis as a tool for evaluating the performance of manufacturing industries.
It covers the examination of ratio analysis as a useful tool for measuring the performance of Glaxersmithkline consumer Plc and the study also, covers theÂ examination of itsÂ annual report and account for a period of five (5) successive financial years (2004-2008).
1.7Â Â Â Â HISTORICALÂ BACKGROUND OF THE CASE STUDY
Glaxosmithkline consumer Nigeria Plc was incorporated in 1971 in the united kingdom with the shares of the company held 46.4 percent and 53.6% by Nigerian shareholders. Glaxosmithkline is formed through the merger of Glaxo welcome and SmithklineÂ BeechamÂ (GSK).
In 2001 Glaxosmithkline moves to itsÂ new U.K. headquarters in Brentford, west London, (NSK Hore consists of an internal fully â€“glazed street; the building wasÂ designed withÂ input from employees, Glaxosmithkline re-organizes its research and development effort intoÂ centres of excellence for drugs development (CEDDs) small business unit that emphasize flexibility, innovation and therapeutic focus Glaxosmithkline launches the African malaria partnership to help combat a disease thatÂ killsÂ more than one (1) million people every year.
In 2002 Glaxosmithkline makes the 19th anniversary of AET, the first medicine used to treat Hiv/Aids. By the end of 2002, Glaxosmithkline had secured 120Â arrangement to supply preferentially priced Hiv/Aids medicines to 50 of the worldâ€™s poorest countries.
In 2003 andÂ 2004, ten (10) million people in sri laika receives free doses of Glaxosmithkline donated albendaole to help prevent the transmission ofÂ lymphatic filariasis. Glaxosmithkline also launches its clinical trail register, an internet site contemning clinical trail data that anyone can access Glaxosmithkline is the first pharmaceutical company to offer this level of transparency for itsÂ clinical trial data.
In 2006 Glaxosmithkline produceÂ over 10 million packs of anti-flu treatment RelenzaÂ inÂ one year to boost its consumerÂ health care portfolio, Glaxosmithkline acquire CNS Ino producers of the breathe Right nasal dilator strips and fiber chance dietary fiber supplements by the end of 2006, 600 million treatment for lymphatic filariasisi hadÂ been donated as part of the company commitment to eradicate award for effort to end lymphatic filariasis.
In 2007 and 2008, it wasÂ a busy year for acquisition, Glaxosmithkline acquires domaritis, a leader in developing anticbody therapies, paresis pharmaceuticals a biopharmaceuticals coming and reliant pharmaceuticals, a producer of cardiovascularÂ medicines.Â GlaxosmithklineÂ submission of combination vaccine Glaxorix to the European medicines Agency (EMEA) with the intention of providing theÂ vaccine to Africawith no commercialÂ reward. AndreweÂ wittyÂ named CEO designate toÂ Â replace IP Gariner in may 2008.
In 2009, weightÂ loss medicine alli launches I n Europe. As influenza A (H1N1) spreads across the world. Glaxosmithkline commits to tackling the pandemic with itsÂ anti-retroviral and vaccine products. Glaxosmithkline and Pfizer viiv healthcare, a new company focused on deliverying advances in treatment and care for Hiv communities. it also agrees to lauch locozade in China. Glaxosmithkline HiNi pandemrik vaccineÂ receives European commission approval, as panel of its commitment to greater transparency, Glaxosmithkline publish speaking and consulting fees paid to U.S Physicians.
And finally in 2010 Glaxosmithkline contribute $1.4 million ofÂ medicines to support victims of the Haiti Earthquake, Glaxosmithkline announces open innovation strategy to helpÂ deliver new and better medicines for people living in the worldâ€™s poorest countries new collaborations will share intellectualÂ property forÂ neglectedÂ tropical diseases such as malaria, Glaxosmithkline joins global vaccine alliance to help prevent millions of children from contracting pneumacoccal diseaseÂ in the worldâ€™s poorest countries.
The company is engaged in the manufacturing, marketing and distribution ofÂ a wide rangeÂ of health care brands, well established in Nigeria. these include the consumer healthcare brands such as panadol, Andrew liver salts, macleans, Aquafresh, Phensic, lucozade, Ribena and a range of internationally acclaimed pharmaceutically,Â including Amoxil and Augmentin (antibiotics) zental (theÂ anthemintic),Halfan (Antifmalaria) and vaccines etc.
1.8Â Â Â Â DEFINITION OF KEY TERMSÂ Â Â Â
RATIO ANALYSIS: Ratio analysis, simply put the analysis of accounting ratios. An accounting ratio to Igben (1999), is â€œa proportional or friction or percentage expressing the relationship between one item in asset of financial statements.â€ Ratio analysis involves the use of ratios asÂ a â€œbench mark for evaluating the financial position and performance of a firmâ€ (Pandey, 1999).
PERFORMANCE EVALUATION: Performance can be defined as â€œthe ability of a person of machine to do something wellâ€ (Longman Dictionary of contemporary English 2nd Edition, 1987). Performance evaluation, therefore involve efforts or activities aimed at assessing the ability of a company to manage investors funds well, so that an optimum return can be earned on the capital invested in them.
ANALYST: â€œIt is an executive whose mental orientation is driven by facts analysis and logicâ€ (Koch, 1991, page 150).
ANALYTICAL TOOLS: â€œIt is an instrument for making rational decision toward achieving the objectives of the firmâ€ (Olowe 1997 pg 239).
FINANCIAL STATEMENT: â€œThese include a large volume of quantitative data supplemented by descriptive notesâ€. (Ekwere, 1997 page 191).
DATA: A much abused plural noun (incorrectly used by most managers as though, it were singular) indicating the objective numerical and factual basis ofÂ analysis and conclusionsâ€ (Koch, 1994, page 15).