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RATIO ANALYSIS: TOOLS FOR PERFORMANCE EVALUATION IN COMPANIES (A CASE STUDY OF GLAXOSMITHKLINE)

Dept: BUSINESS ADMINISTRATION File: Word(doc) Chapters: 1-5 Views: 3

Abstract

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1.0     INTRODUCTION

Financial analysis has become paramount importance in today’s changing business environment. The world has witnessed a dramatic evolution from the archaic trade by barter to the modern complex structure of business and companies.

Every organization, whether public or private prepares financial statements. The information contained in these statements is used to form judgment about the operating performance and financial position of the firm. The stakeholders in a business-concern will be interested in knowing how well the company’s management team has utilised the company’s assets. To obtain answers to this and many more questions, users of financial statements must properly analyze the information provided by these statements in order to have better insight into the strength and weakness of the firm for the purpose of making effective business decision.

For effective decision-making, the information presented in the financial statements must be devoid of errors or material mis-statements. Since the early 90’s, the accounting profession has exporting. Accounting standards were criticized because they were prepared without reference to an acceptable theoretical framework. The financial accounting Standard Board (F.A.S.B) in the United States embarked on a project to develop standards to contribute towards the development of a conceptual framework. Subsequently, the International Accounting Standard Committee (I.A.S.C) issued a document entitled “Framework for the preparation and presentation of financial statement” with the primary objective of providing financial information that is useful in economic decision making by various users of accounts (Jooste, 2005), pare their financial statement in accordance with relevant statements issued by the body in order to ensure the reliability of the information provided by the accounts.

Financial analysis is the process of reviewing and interpreting financial information of a company for the purpose of appraising the financial health and operating performance of the company. It is also defined as the process of identifying the financial strength and weakness of a firm, by examining the relationship between the items of the balance sheet, the profit and loss account etc.

Various users of accounts, such as management, shareholders, employer, creditors, government, and others are interested in different aspect of the company, and have different levels of expertise available to them to analyze what they see. For instance, the management will be interested in virtually all aspects of the company ranging from profitability, liquidity, asset management etc. Likewise, a creditor interest in a company will not be geared towards profit but the ability of the firm to generate sufficient cashflow to meet debt as at when due. Employees will be geared and interested in the profitability of the company as this will ensure sustenance of jobs and perhaps improved welfare and social working condition.

Shareholders and intending investors will be interested in the ability of the firm to generate profits for a relatively long period of time, which will in turn lead to higher dividend payment. The intending investors would want to know if it is wise to invest in the company present shareholders would want to know if their wealth is being maximized or if it will be profitable to invest or divest their shares in the company.

It is to these major businesses decision that the ratios analysis as a means of evaluating becomes important.

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.

1.1     BACKGROUND OF 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

With the increasing complexity of the financial statement and the resultant doubt of whether they are at all meaningful to users with no special training, it is essential the use of ratios analysis as a tool of performance evaluation. Analysts use ratios for financial analysis and also predict financial position of an entity. With the modern competitive environment of business, it is not only essential that management alone perform with the aim of improving on presentation of financial statements but also for other users of the statements. This study shall attempt to examine the various classes of ratios, and how they could be used to evaluate the performance of companies selected for the study.

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     OBJECTIVES OF THE PROBLEM

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.

• 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 analysis evaluates performance in an organization
• 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.
• 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.
• 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 is 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.

Ho:    Ratio analyses are not significant in performance evaluation.

HI:    Ratio analyses are significant in performance evaluation.

 

Ho:   There is no significance difference in the key ratios among industry sectors.

Hi:    There is significance difference in the key ratios among industry sectors.

 

Ho:   Is there any significance difference between ratio analysis and performance evaluation

Hi:    Is there any significance difference between ratio analysis and performance evaluation           

 

1.5     RESEARCH HYPOTHESIS

1. Can financial ratio reveal strength and weakness?
2. To what extent is financial ratio being used to evaluate performance in terms of liquidity, growth and profitability?
3. What are other ways of performance evaluation in a company?
4. Why are ratios useful to management and external users such as government, bankers, debtors, creditors etc?

 

 

 

1.6     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.

 

1.7     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 GlaxoSmithKline 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).1.8 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.

1.9     DEFINITION      OF    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”