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07030248044CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
Return on Assets is one of the measures of financial performance. And financial performance measure is one of the important performance measures for economic units. Financial performance measures are used as the indicators to evaluate the success of economic units in achieving stated strategies, objectives and critical success factors (Katja, 2009). The main objective of financial performance measuring is to determine the operating and financial characteristics and the efficiency and performance of economic unit management, as reflected in the financial records and reports (Amalenda 2010). Financial ratio analysis method is an important measure to financial performance analysis in the economic units because ratio analysis method is the most commonly used financial tool to evaluate the current and past performance in the economic unit and to assess its sustainability (Dick, Feenstra and Wang 2000).
Capital expenditure refers to the decisions related to capital budgeting as replacement of equipment or the expansion of plant. This expenditure is basically related to financial decisions of a firm. This should assure that net present value must be generated. Capital expenditure must be directly related to the corporate income in future. There are two kinds of assets in the commercial firms, such as current asset and the noncurrent t assets. The examples of non-current assets are building, land, plant, machinery and equipment, furniture and fittings and others. The productive capacity can be generated by investing in such assets which ensures long term profit range. The kinds of such assets do not change frequently. The basic purpose of the purchase of such assets is to produce and sale more. Assets have significant role in determining the profit ratio of a firm (Smith 1980)
There are many reasons why the assets are considered to be important. The non-current assets are about half of the total assets of the manufacturing firm and a greater return on investment can be obtained by having huge level of assets which are not current (Igbal and Mati 2012).
According to Okwo, Ugwunta and Nweze (2012) a firm acquires plant and machinery and other productive noncurrent assets for the purpose of generating sales. Therefore, the efficiency of noncurrent assets should be judged in relation to sales. Generally, a high non-current assets turnover ratio indicates efficient utilization of non-current assets in generating sales, while a low ratio indicates inefficient management and utilization of non-current assets. Thus a firm, whose plant and machinery has considerably been depreciated, may show a higher non-current assets turnover ratio than the firm which has purchased plant and machinery recently. By comparing the non-current assets turnover of the two firms, it cannot be conclusive that the former is more efficient in managing non-current assets because of the effects of depreciation. The asset turnover shows how much sales are generated for every N1(one naira) of capital employed. A low asset turnover indicates that the business is not using its assets effectively and should either try to increase its sales or dispose of some of the assets.
Ibam (2008) opined that a company’s investment in non-current asset is dependent to a large degree, on its line of business. Some businesses are more capital intensive than others. Firms in the natural resources just as firms in the brewery industry and other industry producers require a large amount of noncurrent asset investment and large capital equipment while, service companies and computer software producers need a relatively small amount of noncurrent assets.
Ibam (2008) is more interested in the average noncurrent assets. This noncurrent asset turnover ratio indicator looked at asset over time and compares the ratio to that of competitors. This gives the investor an idea of how effectively a company’s management is, in utilizing noncurrent asset. It is a rough measure of the productivity of a company’s non-current assets with respect to generating sales. The higher the number of times turns over, the better. However investors should look for consistency or increasing non-current assets turnover rates as positive position in investment qualities Ibam (2008).
Return on Assets (ROA) ratio illustrates how well management is employing the company’s noncurrent assets to make profit. The higher the return, the more efficient management is in utilizing its asset base. The need for investment in current and noncurrent assets varies greatly among companies. Capital intensive businesses (with a large investment in noncurrent assets) are going to be more asset heavy than technology or service businesses. The capital intensive businesses with a large investment in noncurrent asset will have smaller ROA than non-capital intensive businesses (with a small investment in noncurrent assets) because of a low denominator number. It is precisely because businesses require different sized asset bases that investors need to think how they use the ROA ratio. It is in the light of the above that the effect of noncurrent asset on ROA of cement manufacturing company is important.
The manufacturing companies depending on the structure of assets consist of two types of assets, non-current and current assets. The manufacturing companies use noncurrent assets to transfer the raw materials into finished goods. These assets are called property; plant and equipment include land building equipments, automobiles and furniture (Mawih 2014)
It is the primary concern of business organization to give significant attention to return on assets because of its implications to business survival. High Performance reflects management effectiveness and efficiency in making use of company’s resources and thus in turn contributes to the country’s economy at large.
Poor utilization of noncurrent assets causes low return on investment. And low return on investment measures the effectiveness and efficiency of utilization of assets. Inadequate of noncurrent assets results to low productive activities because noncurrent assets are like the structure while current assets are like flesh. And without the structure the flesh cannot stand. The productive engine is the noncurrent assets in manufacturing organization.
The problem of appropriate level of investment on noncurrent assets to current assets in cement manufacturing firms in Nigeria is vital because more current assets can create high liquidity, surplus cash and high liquidity impairs profitability. The problem of proper evaluation of investment on noncurrent assets is necessary because investment cannot be taken on the hunch, hence investment analysis is very necessary before assets are acquired for income yielding.
It can therefore be argued that despite the strategic importance of non-current assets in cement manufacturing firms in Nigeria, comprehensive and up to date information about the level of significance of non-current assets contribution to Return on Asset is lacking. Most studies were not carried out on cement manufacturing firms and did not use return on assets as proxy for financial performance.
To address this gap this study was designed to specifically look at the evaluation of the effect of noncurrent assets on the return on assets of cement manufacturing industry in Nigeria for the period 2004 – 2013.
Cement Manufacturing Industry
Establishing a cement factory is highly capital intensive which makes a cement factory very expensive to install and maintain. The cost of cement production is very high all over the world, with energy being the major cost center.
The consumption of cement in Nigeria is determined by factors influencing the level of housing and industrial construction, irrigation projects, roads, water supply pipes, drainage pipes, establishment of new universities by federal government and private individuals. Growth in population and level of urbanization in major cities like what we are currently experiencing in Lagos and Port-Harcourt are also other factors that confirm the imminent demand for cement in Nigeria and other parts of Africa. All these including the supply gap of cement in Nigeria show that future investments in Nigeria cement industry will be a viable venture.
Historical Background
Lafarge WAPCO was established as a result of the country’s vision to gain economic freedom alongside its national independence. Lafarge WAPCO formerly West African cement Plc (WAPCO), was established at a time when the country was solely dependent on importation in the fifties from England into the country. Having fulfilled the national desire to establish a cement manufacturing company. Lafarge WAPCO, since its operation in 1960 has made tremendous contribution to the availability of cement in Nigeria, the company’s brand, elephant cement, is of impeccable standard and quality with strength, maturity, resistance, durability and reliability. The company has consistently won the NIS certificate for product quality by the Nigeria Standard organization for over two decades now. The elephant brand has helped to build edifices, brought monumental projects to life, create a serene atmosphere and positively impacted the lives of Nigerians socio economically prior to the emergence of Dangote cement Plc in the Nigeria cement industry. WAPCO was the industry leader with highest market share. At present WAPCO market share covers the entire western region. The entry of Lafarge into the company and Lafarge consist of WAPCO, Atlas cement (Port Harcourt, Ashaka cement (Ashaka) and substantial stake in Unicem calabar.
The company has potential for long term growth.
Investment and production challenges in Nigeria are as follows:
- Very high starting and maintenance capital of a cement factory
- Poor power and energy supply for cement manufacturing
- High supply gap which leads to high price of cement
- Dwindling governmental policies which is affecting investment in the industry
- Lack of modern technologies in the production of cement.
Ashaka Cement Plc
Ashaka cement Plc is a subsidiary of a Lafarge group, a world leader in cement manufacturing. Ashaka in July 2001 after the acquisition of blue circle industries plc and since that time lafarge has continued to support Ashaka’s operations to improve performance resulting in better returns to all its stakeholders. Ashaka cement values are partnership with Lafarge because of the tremendous benefits we have derived from its corporate programs. This was seen to have resulted in improved performance, better results and profitability for the benefit of Ashaka’s shareholders, employees, customers and the hosting communities. Ashakacem’s principal activities are the manufacturing and marketing of cement products.
Dangote Cement Plc
Dangote cement Plc incorporate as obajana cement in November 1992 prior to the planned special sale of shares is 95% owned by Dangote Industries limited. After a while, Dangote industry limited decided to consolidate all the cement entities within the Dangote group into a single entity by transferring all the cement assets into Dangote cement plc. Prior to this Dangote cement offered to merge with Benue cement Plc with the goal of consolidating the cement producing entities of Dangote industries limited in Nigeria under a single entity presenting a robust platform for the enlarged Dangote cement Plc. The current Dangote cement plc comprises of Obajana cement plant, Ibese cement plant, Benue cement plant, Lagos cement Terminal and Dangote Onne terminal
1.2 Statement of Problem
The optimization of investment on non-current assets in order to achieve satisfactory return on asset is a major problem being suspected by the researcher in the cement manufacturing industry in Nigeria. Given the huge investment on noncurrent asset, the return on Asset seems not to be satisfactory as perceived by the researcher. This inadequate production of cement in the country with regard to demand causes high prices of cement and sometimes scarcity in the market. The problem of scarcity often leads to importation of cement in the country causing capital flight and foreign exchange. The inadequate plant and machinery creates low production activities. While surplus investment on land and building does not affect directly the production of cement in the production of cement in the country, the investment do not create productive activities in the cement manufacturing industry in Nigeria. This undesirable situation attracted the attention and interest of the researcher in evaluating the optimization of investment in non-current asset of cement manufacturing industry in Nigeria in order to assist the investors and management of the cement manufacturing industry.
1.3 Objectives of the Study
The main objective is to determine the effects of noncurrent assets on the return on assets of cement industry in Nigeria.
The specific objectives are as follows:-
1.4 Research Questions
1.5 Statement of Hypotheses
Ho1 The amount of investment in plant and machinery does not
significantly impact on the return on Assets of cement manufacturing industry in Nigeria
Ho2 The amount of investmentonland and buildings does not significantly affect the Return on Assets of cement manufacturing industry in Nigeria.
Ho3 The amount of investment in motor vehicles does not significantly impact on the Return on Assets of cement manufacturing industry in Nigeria.
Ho4 Investmentin furniture and fittings does not significantly affect the Return on Assets of cement manufacturing industry in Nigeria.
1.6 Significance of the Study
The study was undertaken to evaluate the effect of noncurrent assets on return on assets of cement manufacturing industry in Nigeria.
The study will be of primary importance and benefit to the cement manufacturing companies in Nigeria.
Other importance of the study is its contribution to knowledge. It would be useful to other researchers and anyone who is interested on the evaluation of effect of investment on noncurrent asset on return on assets of cement manufacturing industry in Nigeria.
1.7 Scope of the Study
The research work was restricted to evaluation of effect of noncurrent assets on return on assets of cement manufacturing industry in Nigeria for the period of 2004-2013. The dependent variable is Return on Assets (ROA) and return on Assets (ROA) was used as the variable for financial performance, while independent variables are noncurrent assets (Plant and machinery, land and buildings, motor vehicles, furniture and fittings.
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