Abstract

This study examined the role of ratio analysis in business decision making in Community Credit Company Buea. The specific objectives were: to investigate the extent to which profitability affect ratio analysis in business decision making in Community Credit Company Buea, to ascertain how liquidity impact ratio analysis in business decision making in Community Credit Company Buea and to determine the impact of solvency on ratio analysis in business decision making in Community Credit Company Buea.

The study adopted the Cross-sectional research design and the descriptive research design and the target population consisted of the management and all the staffs of Community Credit Company Buea. Thirty staffs in the institution were selected using convenient sampling technique.

Primary data was collected through the use of Questionnaires analyzed using both descriptive statistics (frequency tables, percentages, mean and standard deviation) and inferential statistics (correlation and regression analysis) with the help of statistical package for social sciences (SPSS).

The hypothesis was tested through a correlation test, and it revealed that there is a moderate positive relationship between ratio analysis (profitability ratio, liquidity ratio and solvency ratio) and decision making in Community Credit Company Buea at Pearson correlation coefficient (r=0.474**, p=0. 0000).

This implies that ratio analysis affects decision making in Community Credit Company Buea by 47.4% and 52.6% by other factors.

The study therefore recommends that for every policy measure taken by CCC PLC to improve ratio analysis techniques, Profitability Ratio, Liquidity Ratio and Solvency ratio should be taken into consideration because failure to do so will lead to detrimental effect on their decision making. The study further recommends that the institutions should regulate their performance effort as they look on the influence ratio analysis have on decision making.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Accounting measures and communicates economic information needed for decision –making. Thus, the American Accounting Association defined Accounting as “The process of identifying, measuring, and communicating economic information to permit informed judgments and decision by the users of the information”. In a similar case, the American Institute of Certified Public Accountant (AICPA) defined accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpreting the results thereof”.

The main primary objectives of every business are profitability, efficiency and solvency. Profitability is the ability of a business to make profit, while solvency is the ability of a business to pay debts as they come due. The achievement of these objectives requires efficient management of resources of the business through planning, budgeting, forecasting, control, and decision making.

Also, the strength and weakness of the business needs to be identified and should apply necessary corrective measures. Interestingly, accounting provides information that facilitates these functions (Zietlow, Hankin, Seidner, & O’Brien 2018). Statement and the Balance Sheet. The income statement shows the profitability or operational result of a business, while the balance sheet shows solvency or financial position of a business.

Even though profit are often used as the basis for judging the performance of a business, such profits must be related to the various items of financial statement in order to be meaningful and useful for decision making. Furthermore, owing to the summarized nature of financial statement, a lot of truths are hidden in them. Thus, they need to be analyzed and interpreted by means of financial ratios to enable the users understand the meaning of absolute amounts shown in them, and make informed business decisions (Palepu, Healy, Wright, Bradbury and Coulton 2020).

In this regard, (Essien 2006:144) observed that, the financial statements carry lots of financial information that are hidden in the figures. The figures in financial statements become more useful when they are related to each other or to some other relevant financial data. Therefore, users of financial information go a further step to establish ratios among selected data in financial statement.

Ratios are simply mathematical expression of relationship of one figure to another which may come from the same statement or from different statement. Accounting ratio, by their very nature serve as indicator of the performance of a company both past and present (Brigham 2016).

According to (Subramanyam and Wild 2015) “Ratio analysis is the evaluation of a company’s financial statement by examining the relationship between two key financial items using mathematical formulas”. Accounting ratios are the most powerful of all tools used in analyzing and interpreting financial statement”.

Therefore, ratio analysis involves taking stats of number (or items) out of financial statement and forming ratios with them, to enhance informed judgments and decisions. According to the American Institute of Public Accountants, “ratio analysis is used to assess performance and liquidity and to forecast the future by extra piloting trend” thus ratio analysis is analytical technique used in making business decisions in the centre of this research work.

MCShane et al. (2000:336) defined decision-making as “a conscious process of making choice among one or more alternatives with the interior of moving toward some desired state of affairs. Therefore business decision can be defined as choices relating to the allocation and/or use of business resources to achieve business goals.

Decision-making calls information observed: “Managers want information because they need to make decisions. The proper use of information is an important part of decision-making “. Remarkably, one of the effective ways of providing information needed for decision-making is ratio analysis. In other to help managers in their decision making process, several categories of ratios are used. We use the liquidity quotients like current ratio, quick ratio and cash ratio to measure the ability of an organization to meet its current liabilities with the use of current assets (Aithal, 2017)

Mazikana (2022), noted that business decisions make or buy, investment or divestment, expansion or contraction, capital-organization and reconstruction, and so on cannot be properly made without the aid of financial ratios.

They give cue to the financial strengths and weaknesses of a business, and highlight aspects of a business requiring further investigation. Therefore, this research is carried out to show how ratio analysis helps managers, shareholders, investors, creditors, and other stakeholders make informed judgments and decisions about the past performance, present condition, and futures potential of a business.

1.2 Statement of the problem

Financial information provided in financial statements are useful in business decisions. Nevertheless, it must be noted that financial statements are means to and not an end in themselves. Thus the use of financial statement in decision making is not always easy owing to the following problems:

In view of the summarized nature of the information contained in financial statements, they need to be analyzed and interpreted by means of financial ratios to enable management and stakeholders understand them and make well-informed business decision.

Many users of financial statement are not knowledgeable about accounting ratios and how the ratios can be applied to financial statements to help decision making.

In spite of the huge benefit of ratio analysis, there are a lot of weaknesses or limitations associated with its use. In view of the above stated problems, this research is embarked upon to identify the proper use of financial ratios, and the roles ratio analysis plays in business decisions.

1.3 Research questions

1.3.1 The main research question

What is the role of ratio analysis in business decision making in community credit company buea?

1.3.2 Specific research questions

1. To what extent does profitability affect ratio analysis in business decision-making in community credit company Buea?
2. How does liquidity impact ratio analysis in business decision-making in community credit company buea?
3. What is the impact of solvency in business decision-making in community credit company buea?

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