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RATIO ANALYSIS AS A TOOL FOR
PERFORMANCE EVALUATION
CHAPTER ONE
INTRODUCTION
1.0 INTRODUCTION
Ratio has been most important tools for the
effective development of manufacturing
companies and industries, the major uses of ratio is to access 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 of 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 of
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.
“Financial statements, in their
raw forms hold little or no meaning to
the user. The figures contained there is
have to be converted to ratios in order to ensure easy analysis, ratios are not
the end but a means to an end. They
ensures analyst ask the right question” (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 the
indicated 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’s 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’s capital structure
and its leverage.
a. To
evaluate ratio analysis as a tool for measuring the performance of
manufacturing industries.
b. To help
users of financial statement know the extent to which ratio analysis evaluates performance in an organization
c. To
analysis the company solvency, in
relating to current assets and current liabilities and the breakdown
of these measures to show the effect of cash flow, inventory change and
movements in debtors and creditors.
d. To
assess the company in terms of value
to investors ratios dealing with this area includes PE
(Price/earnings) ratio dividend yield and other such investment criteria.
e. And
lastly, to open another angle to ratio
analysis an which future researchers can
explore and hence, further an area not covered by the present research 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 conjectural 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): Ratio
analysis are not significant in performance evaluation.
Alternative
hypothesis (HI): Ratio
analysis are 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 the researcher’s audience on the usage of
financial ratio in assessing a company’s performance.
It is equally expected that prospective investors with little or no
accounting knowledge would be able to critically evaluate the financial statement of organizations, which are of
interest to them when carrying out investment decisions.
Finally, future researchers
in similar field would find this
research work useful, 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 the examination of its annual report and account for a period of
five (5) successive financial years (2004-2008).
1.7 HISTORICAL 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
Smithkline Beecham (GSK).
In 2001 Glaxosmithkline moves
to its new U.K. headquarters in
Brentford, west London, (NSK Hore consists of an internal fully –glazed street;
the building was designed with input from employees, Glaxosmithkline
re-organizes its research and development effort into 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 that kills 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 120 arrangement to supply preferentially priced
Hiv/Aids medicines to 50 of the world’s poorest countries.
In 2003 and 2004, ten (10) million people in sri laika
receives free doses of Glaxosmithkline donated albendaole to help prevent the
transmission of 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 its clinical trial data.
In 2006 Glaxosmithkline
produce over 10 million packs of
anti-flu treatment Relenza in one year to boost its consumer 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 had been donated
as part of the company commitment to eradicate award for effort to end
lymphatic filariasis.
In 2007 and 2008, it was 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 cardiovascular
medicines. Glaxosmithkline submission of combination vaccine Glaxorix to
the European medicines Agency (EMEA) with the intention of providing the vaccine to Africawith no commercial reward. Andrewe witty
named CEO designate to replace
IP Gariner in may 2008.
In 2009, weight loss medicine alli launches I n Europe. As
influenza A (H1N1) spreads across the world. Glaxosmithkline commits to
tackling the pandemic with its
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 vaccine 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 of
medicines to support victims of the Haiti Earthquake, Glaxosmithkline
announces open innovation strategy to help
deliver new and better medicines for people living in the world’s
poorest countries new collaborations will share intellectual property for
neglected tropical diseases such
as malaria, Glaxosmithkline joins global vaccine alliance to help prevent
millions of children from contracting pneumacoccal disease in the world’s poorest countries.
The company is engaged in the
manufacturing, marketing and distribution of
a wide range 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, including Amoxil and Augmentin (antibiotics)
zental (the anthemintic),Halfan
(Antifmalaria) and vaccines etc.
1.8 DEFINITION OF KEY
TERMS
RATIO
ANALYSIS: Ratio analysis, simply put the analysis of accounting ratios. An
accounting ratio to Igben (1999), is “a proportional or friction or percentage
expressing the relationship between one item in asset of financial statements.”
Ratio analysis involves the use of ratios as
a “bench mark for evaluating the financial position and performance of a
firm” (Pandey, 1999).
PERFORMANCE
EVALUATION: Performance can be defined as “the ability of a person of machine
to do something well” (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: “It is
an executive whose mental orientation is driven by facts analysis and logic”
(Koch, 1991, page 150).
ANALYTICAL
TOOLS: “It is an instrument for making rational decision toward achieving
the objectives of the firm” (Olowe 1997 pg 239).
FINANCIAL
STATEMENT: “These include a large volume of quantitative
data supplemented by descriptive notes”. (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 of analysis
and conclusions” (Koch, 1994, page 15).
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