Abstract               

The aim of this study is to determine the impact of ratios analysis on investment decisions For this to accomplished, relevant literature was reviewed and necessary theories were used.

The main objectives being to examine the impact of ratios analysis on investment decision making were guided by a hypothesis stated both in the null and alternative form with the null form being “Ratios analysis does not have a significant effect on investment decision making” and the alternative form stated otherwise.

The area under review was the Buea municipality precisely Molyko with case study being Guinness Cameroon SA Buea. Both Primary and secondary method of data collection were used with the main tool being questionnaires.

The data collected was processed using the spreadsheet after coding had been done. From the analysis, it was discovered that the impact of ratios analysis seems to be undergoing a metamorphosis. However, comparatively on the response of positive impact as against the nonimpact of ratios analysis, the positive impact out wares the negative impact.

This therefore brings us to accepting the hypothesis that ratios analysis has a significant impact on investment decisions. This paper recommends that investors should screen financial statements before making investing decisions.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Man always seeks the existing order and understanding about the phenomenon governs by laws, governing their relationship and was able to explain phenomena and to predict their behavior.

This kind of attitude towards integrated data collection was done to make better decisions. Ratios analysis owes its origin to Enclid. He for the first time made a rigorous analysis of properties of ratios in Book V of his element published in about 300BC.

Since then, ratios have been used extensively as analytical tools in the field of science and technology.

A preponderance of evidence suggests that, since the late 1800s, ratio analysis has been widely used in the analysis and valuation of published financial data.

During much of this time, security analysis firms (e.g. Dun and Brad Street) have published and presumably profited from publishing, listing of annual financial ratios values for various firm and industries.

In the 19th century, between 1920 and 1929, interest in financial ratios increased and many articles were published. Commercial institutions, Universities, Credit institutions, analysts began to collect data in an attempt to determine each industry’s average. This process of collecting and calculating each industry average was called (scientific analysis of proportions).

Furthermore, Bliss Blys (1920) first coherent system of ratios provided that, the reasonable, and in line with previous method of maintaining continuity was important point. Bliss ratios constitute (fundamental indicator of status relation within a company).

It’s also believed that the standard relationship between companies can be competitive in terms of comparison set. With these assumptions, the model provided an economics unit that was too contained total ratios to assess profitability.

Bliss’s model and assumptions were simple but his studies for the development of proportion analysis was very promising. He introduced a triangle of ratios which at the top was the return of investment ratio and of the two sides of the base were the profit margin and turnover of total assets. His volume passion to use ratio analysis was subject to criticisms.

In addition, Smith Vynakor, studies about the ability of financial ratios to predict financial problem in a number of companies.

Their research concluded that the ratio of “net working capital to assets” of accuracy and stability have been determined as an indication of failure.

Fritz Patrick equally reviewed 20types of company faced with bankruptcy. He discovered that eleven companies out of the 20 companies, used ratios to some degree but their failure to predict net profit to equity ratio, the equity to debt, and equity to fixed assets was the best indicator of failure.

The graduation of Western economies particularly of the united states into modern industrial economies needed the ever-increasing support of financial institutions and banks. Credit became the movers of industrial activity and hence the financial sector came to be more powerful than the industrial sector of the economy.

As such, credit analysis was developing concomitantly with financial performance analysis. It was seen to become a distinct discipline. Although both disciplines used financial statements analysis as their basis, their approaches were different.

A lender’s concern was to develop measures for judging the ability of the borrower to repay the loan. A number of ratios were developed during this period toward this direction.

As the business of banks and financial institutions were primarily to deal in the uncertain features of individual enterprises with les information than the enterprise managers, they suffered from a greater amount of tension than the later.

This made them demand more and more information from business enterprises. Financial statements were enlarged to accommodate this demand and with this, credit analysis expanded the arena of ratio analysis. The credit analysis approach came to dominate, the general development of ratio analysis especially in the earlier years.

According to Foulke(1961) and Horrigon(1968) toward the end of the 19th century the practice arose for comparing current assets of a firm with it current liabilities through current ratio, which was to have for a long time a more significant and long lasting impact upon financial statement analysis that any other accounting ratio. In the first decade of the 20thcentury, the idea emerged that for financial equilibrium. The current assets should be about twice the value of current liabilities. (Lough 1917)

When industrial development in the western hemisphere reached its height at the beginning of the 20th century, management research found a dominant place in the intellectual activity of scholars and naturally, were drown to such an interesting area like ratio analysis.

World War 1 intensified such activity which resulted to all the development of a large number of ratios along with operations research. Ratios first aimed at measuring the risk potential of a venture while later attempting to devise method to minimize such risk.

However, the development of such large number f ratios, and many of them were not used by businesses and financial analyst.

Current ratio continued to be the most widely used ratio.  Inter-firm analysis and relative ratio criteria follow suit as well as development of absolute ratio criteria which is known as the 2:1 current ratio.

Management strongly depends on accounting information for taking various strategic decisions.

According to Essien (2006: 144), financial statements carry lots of financial information that are hidden in the figure. The figures in the financial statement become more useful when they are related to each other or some other relevant financial data.

Therefore, users of financial information go a further step to establish relationship (or ratios) among selected data in financial statement this research is carried out to show the impact of ratios analysis on managers, shareholders, investors, creditors, and other stakeholders to make informed judgments’ and decisions about the past performance, present conditions and future potential of a business.

1.2 Statement of Problem

The insurgence of corporate failure like that of Enron Corporation and World.com on the 2^nd of July 2002 and other accounting scandals compounded by the Global energy, food and financial crisis leading to credit squeeze across the globe, has partly been attributed to the effect of financial manipulations which portrayed some ailing companies as if they were sound.

Enron Corporation as mention above was the champion of energy deregulation that grew into the nation’s ten largest companies with asset of $62billion filed for bankruptcy on the 2ndof December 2001leaving 20 000 staff unemployed after being audited by one of the big five audit firms-Author Anderson.

The collapse of Enron Corporation was due to the fact that their financial statements were confusing to shareholders and analyst and also due to the unethical practice which required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance.

In Africa, precisely Nigeria and Cameroon Corporate failure and distresses have been witnessed in the banking sectors.

Evidence was the huge collapsed of Cooperative and Commerce Bank PLC (CCB) on the 16th of January 1998, African Express Bank Ltd and City Express Bank PLC on the 16th of January 2006 all in Nigeria.Cameroon equally witnessed the collapse of COFINEST (Compagnie Financiere de l’Estuaire) on the 23rd of March 2011 with major shareholders arrested for malpractices and mismanagement.

This trend has now more than ever ensures that financial statement are sternly scrutinized. Financial analyst and other users of financial information tend to use their eyes to scrutinized financial statement.

This is because, audited financial statements which used to provide assurance as to the healthy nature of a firm has now become an object of criticism due to manipulations done in these statements.

According to Bishop and wells (2002), one of the most difficulties facing the auditing profession is that there is no auditing process that can provide absolute assurance in detecting all fraudulent financial reporting and thus investors do not have confidence on the financial statement prepared. Businesses regularly prepare financial statements such as the income statement, balance sheet and statement of cashflows.

When these financial statements are released they can have large impacts on the business and on the investors of the company. Therefore, it’s critical for the business to ensure that the information  in these statements present are correct.  In addition, many investors look at the financial statements when making investment decisions.

When a company issues new shares of stock, it will most likely distribute financial statements to potential investors.

The potential investors will examine the financial statement to determine if they want to put money into the company or not. Low earnings numbers could negatively impact the number of investors willing to put money into the business.

Furthermore, if information presented in financial statements is better or worse than expected, it can send the stock price up or down.

Financial ratios are important tools in management decision. Because of this, the financial statements can have a drastic effect on the investors of a business. Thus the proper usage of accounting ratios assists management in communicating information which is pertinent and powerful for investment decision making.

Most investors and other financial statement users see the financial statements prepared by a given company and they either invest or give a loan to the company and after a period of time, the company collapse and their money is gone due to their inability to the investor to analyze the financial statement of a company.

This study is therefore carried out to analyze some specific aspects of the financial statement using ratios and they include profitability, dividend per share, earning per share, leverage and liquidity. The research is therefore structured to answer the following questions.

1. What are financial ratios?
2. What is an investment?
3. What are investment decisions?
4. What will be the outcome of investment decisions if financial ratios were not analyzed or wrongly analyzed?
5. Which method of analysis should be used to obtain a better decision?
6. What content of the financial statement is analyzed using ratios analysis?
7. How financial statement analysis does affect potential investors’ investment decisions?
8. How can a financial statement influence an investor to invest in a company?
9. Why should managers and investors rely on accounting ratios in decision-making?
10. Does all profitable investment decisions based on the analysis of financial statements?

1.3 Research Objective

1. To identify the various types of ratio analyzed using financial statements.
2. To examine the impact of ratio analysis on investment decision
3. To make necessary recommendations

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