USER OF ACCOUNTING RATION BUSINESS DECISION (A CASE STUDY OF NIGERIA BREWERIES PLC).
The examination of the relationship between different items in accounting by the calculation of accounting ratios.Several authors have offered in their various literature, the accounting ratios merely provide dues that necessitation deeper probing to discover underlying causes. However, there is a growing body of evidence that shows that accounting ratio can be directly helpful as a basis for making predictions, and assessing performance and efficiency of any enterprise financial ratios have been found through various studies, both univariate and multivariate studies, to be excellent indicators of risk in a company: (Beaver 1966).
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There are two major purpose financial statement analysis. Solvency determination
- PROFITABILITY EVALUATIONS
Solvency determination is the assessment of the likelihood of the future rate of return a given security. Empirical studies have shown that ratios related to income posses the highest predictive power for both purposes. Accounting ratios or ratio analysis is powerful tool of financial analysis.
In financial analysis, the ratio is used as an index or yard stick for evaluating of the firms. An accounting figure conveys meaning when it is related to some other relevant information. For instance a N100,000 net profit may look impressive but the firm’s performance can said to be good or bad only when the net profit figure is related to the firm’s investment. The relationship between two accounting figure expressed mathematically is known as accounting ratio (or simply as ratio). A ratio helps the analyst to make qualitative judgement about the firm’s financial position and performance. For example current ratio is calculated by dividing current asset by current liabilities.
According to (Edmister 1972) “Current ratio is an index or yardstick which permit a qualitative judgement to be formed about the firm’s ability meet its current obligation. This measures a firm’s liquidity and vice versa.
To this extent, therefore, the nature of all accounting ratios is indicating qualitative judgement.
2.1 PROFILE OF NIGERIAN BREWERIES PLC.
Nigerian breweries plc was incorporated in Nigeria in 1946. It is the pioneer and largest brewery company in Nigeria. The company recorded landmark in 1946 when its first bottle of Star larger Beer rolled off the bottling line in its Lagos brewery. In 1957 Aba brewery was commissioned, this was followed by Kaduna brewery which was commissioned in 1963 also, Ibadan brewery was commissioned in 1982.
However, in September 1993 the company acquired its fifth brewery in Enugu. Thus from humble beginning of Nigerian breweries from which quality produces are distributed to all nooks and Granny of Nigeria.
OPERATIONAL ACTIVITIES
The operational activities of Nigerian breweries plc span the building industrial and commercial sectors of the company, brining benefits to each sector Viz.,
Manufacturing and Distribution to enable the products of the company reach its ultimate consumers throughout the country, the company operates depots in all the major cities of the country.
Nigerian Breweries plc has steadily made great efforts to develop its Nigeria distributors and confidence and good will bent over the year are important elements of their successful distribute strategy.
BRAND PORTFOLIO
Nigerian breweries plc has seven high quality brands – Star larger beer (1949) Gulder larger beer (1970); Maltina (1976) legend extra stout (1992) and AMSTEL Malta (1994), Gordon park (2001), and heinekain (2000).
RESEARCH AND DEVELOPMENT
Nigerian breweries plc has kept pace with key international developments, this ensuring that its system process and operational procedures are always in formity with Nigerians requirement. It is in line with this, that in 1987 it established research and development centre that worth N4m.
SOCIAL RESPONSIBILITY
A Nigerian Brewery plc, with more than 50,000 shareholders, is socially responsible in areas of sports, health and education etc.
This company showed this when it established educational trust fund of N100,000,000 to take more active part in finding educational research facilities in tertiary institutions in Nigeria.
2.2 STANDARD OF COMPARISON
The ratio analysis involves comparison of a useful interpretation of financial statements. A single ratio in “itself does not indicate favourable or unfavourable condition it should be comprised with some standard. A standard of comparison may consist of:
- Ratio calculated from the past financial statement of the same firm.
- Ratio developed using the projected or perform a financial statement of the same firm
- Ratio of some selected firm especially the most progressive and successful at the same point in time.
- Ratio of the industry to which the firm belongs.
The simplest way to evaluate the performance of the firm is to compare its present ratio with the past ones. When accounting ratio’s over the period of time are compared, they give an indication of the direction of the direction of change and reflect whether the firm’s financial position and performance have improved, deteriorated or remained constant overtime. This kind of comparison moreover is valid only when the firm’s accounting policies and procedures have not changed overtime. Sometimes, future ratios are used as the standard of comparison. They can be developed from the projected or proforma financial statements. This comparison of the past ratio with future ratios shows the firm’s strength and weakness in the past and the future and this tends to affect major and external investors make. When the future ratios indicate weak financial positions, corrective actions should be initiated.
The researcher also observed that the management of the firm would be interest in every aspect of the financial interest in every aspect of the financial analysts appriase their effectiveness in the management. It is their overall responsibility to see that resources of the firm are used most effectively and efficiently and that the firm’s financial condition is sound.
Though financial analysis, they try to seek answers to the following question.
- Is the firm in a position to meet its current obligations?
- What sources of long-the firm employs terms financial and what is the relationship between them?
- Is there any danger to the solvency of the firm due to employment of excessive of debt?
- How efficiently does the firm uses its assets?
- Are the earnings for the firm profitable and sate for investors to invest their money in the hsares of the firm?
It is important to note that financial analysis may not provide exact answers, but it does indicate what can be expected in the future. Answers to these questions above are provided by calculation of ratios, which have been variously defined as a technique of analysis the financial information contained in the balance sheet and profit and performance of the firm or company. It is believed that the measurement of a company’s performance using financial data has inherent problems. The main difficulty in such analysis lies in that fact that as historical data are utilized in order to asses present matter and future trends; it is impossible to be too exact in the statements and recommendations which it is necessary to make. There is a description of various tool of trade necessary to make such qualitative judgement on the efficiency of an organization. Such tools are accounting ratio, statistical method and various analysis. For the purpose of this research, the researchers is evaluating accounting ratios and its uses in business decisions. Statistics is not an exact source, but its conclusion is nonetheless valuable. Likewise, in the field of accounting the use of account ratio where not providing exact information as in the financial status of the business nevertheless are the most valuable management tools.
According ratios are the most widely used technique for interpreting the company’s financial reports. Ratio are useful because they can be used in summaries briefly relationship and result which are significant to an appreciation critical business indication of performance. Moreover, the company’s performance from year to year, and the performance of different companies, given the aggregate figure are always of different orders of magnitude. Since the future is uncertain the analyst has to rely substantially on the past behaviour of firms for predicting future charge. In this respect, the tend indicated by ratio are very useful in making prediction, for example, it is not know which soccer term will win the championships next tournament. Hence, in making any predication in this respect, one has to rely on the performance of all the teams in the previous seasons.
The function of ratio analysis, therefore in business decision is allow comparison to be made which assist users of financial statement in predicting the future.
In this connection, it should be stressed that the fact that Okechukwu ltd. Has favourable ratio of net profit to asset employed in the year 1994 is meaningless by itself unless it is compared with those of its competitors.
Consequently, inter-firm comparison were facilitated in UK, when the center for interterm comparison ltd, the non profit making organization was established in 1959 by the British Institute of management in association with the British productivity council. The organization obtained confidently from subscribers the large amount of management information computed there from the battery of ratios and reported these ratios to the subscribers to the with the best, worst and average of all subscribers within a given industrial class.
Therefore, account ratios reveal strength, weakness and means of improvement in any organization which invariably measures and draws out how business decision should be taken. Ratio enables view to be formulated by relating net profit to such indicators as net asset or share price and as far as the investors is concerned relating to dividend to corporate net profit and share price.
- RATIO AS PREDICATION OF BUSINESS FAILURE:
AN EMPIRICAL APPROACH
Empirical studies have been undertaken to determine the extent to which accounting ratio may be used to predict business failures. The ability to predict company’s private investors and social view point, as it is an obvious indication of resources Mis-allocation (Beaver) 1966; is of the opinion that accounting ratios provide to be useful in the predication or failure. Such that , such failure could be predicated at least five years before the event.
An early warning signal of probable failure would enable both management and investors to take preventive measure .
2.4 CLASSIFICATION OF ACCOUNTING RATIOS
Accounting ratio can be grouped into various classes and the choice of classification made depends largely on the purposes of our analysis, several classifications have been offered in the literature but the following will surface for our purpose.
- Classification based on the sources of data i.e which financial statement constitute the sources of data for the ratios thus we shall find here a classification into balance sheet and profit and loss account ratios.
- Classification based upon the specific purpose of the researchers study; thus we have:
- Liquidity ratio
- Profitability ratio
- Measurement of management efficiency
- Ownership ratios
At the end of the day, we shall find deep overlaps between these classifications and its is therefore difficult to recommend one over the other.
As it will shown below diagrammatically, even the balance sheet and profit and loss account classification still ends up given ratio based on the purpose to the study. As stated earlier, the parties, which generally undertaken financial analysis, are short term creditors, long term creditors (debentures) owners and management., short-term creditors main interest is in the liquidating position or the short term solvency of the firm. Long term creditors, on the other hand are interested in the long-term solvency and profitability of the firm.
Similarly, owners concentrated on firm’s profitability analysis and that of its over all financial condition. Management is interested in evaluation every activity of the firm.
- TYPES OF RATIOS
However, in view of the requirement of various uses of ratios, the researcher has classified them into the following four important categories viz.
- liquidity ratio
- leverage ratio
- profitability ratio
- activity ratio
- LIQUIDITY RATIO: It is extremely essential for the firm be able to meet its obligation as the become due. According to Osaze (1989) liquidity ratio measures the ability of firm to meet its short-term obligation before and when the fall due.
Infact, analysis of liquidity needs the preparation of cash budget and flow statement, but liquidity ratio by establishing the relationship between cash and other current asset to current obligation provides a quick measurement of liquidity. (A firm should ensure that it does not suffer from lack of liquidity (illiquidity) and also that it is not too much highly liquid.
The failure of a company to meet its obligation due to lack of sufficient liquidity, will result in bad credit rating liquidity, loss of creditors confidence or even a law suits resulting in the closure of the company. A very high degree of liquidity is also bad, idle assets earn nothing.
The ratios which indicates the extent of liquidity or lack of it are as follows:-
- current ratio
- quick ratio
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