A STUDY OF THE USE OF FINANCIAL RATIOS FOR THE ASSESSMENT OF THE PERFORMANCE AND THE PROFITABILITY OF A FIRM

CHAPTER ONE

INTRODUCTION

1.1                   BACKGROUND OF THE STUDY

The significance of Financial Rations and its analysis can not be over emphasized.  According to Iloh (2001), a good financial planning for any functional organization has to be related to the existing strength and weakness of such organization.  In the effort to discover the aforementioned factors, it becomes necessary to evaluate the performance of such organization over a given period.   Financial Ration analysis is therefore one of the methods used in determining the level of performance of an organization.  It can be explained as the techniques of reducing aggregate financial data into meaningful quotients, which are compared to other existing financial data.

However, the researcher has developed interest in this particular topic in order find out the impact of financial ratio analysis, mostly to a lending banker.  This is because, the issue of credit extension is not an easy task and is of technical in nature, one of the criteria for a successful lending is the review of the Financial Statements of a borrowing firm.  This is actually carried out with help of ratio analysis.

Furthermore, the analysis of such financial statements will enable a lending banker to access the viability of such borrowing firm, in the area of liquidity, profitability as well as the nature of its funding.

Conclusively, having indept knowledge of the above concepts mentioned above through Financial Ration analysis, the lending banker will now be able to take appropriate decision on either to accept or reject a given loan proposal or request.

1.2    STATEMENT OF THE PROBLEM

The occurance of loan default is becoming so alarming in most NigerianBanks.  This has affected most banks, specifically their capital adequacy, which invariably led to distress and failure. According to Orjih (1996), manipulation of accounting records by borrowers as well as inappropriate review and analysis of the financial statements of the borrower are among the causes of loan default and bad debt.  That is, it creates room for the borrowers of fund to deviate from the terms of payment or repayment of fund borrowed from the lending banker.

For several years, most banks have experienced distress and failure as a result of bad lending through inappropriate analysis of financial statements.  Therefore, the researcher intends to find out the necessary measures that could be adopted in order to remedy this urgly situation.

1.3    PURPOSE/OBJECTIVE OF THE STUDY

The study of this research work (the use of Financial Rations for the assessments of the performance and profitability of a borrower by a lending banker) intends to achieve.