INDEPENDENT INSTITUTE OF LAY ADVENTISTS OF

KIGALI

THE EFFECT OF RATIOS ANALYSIS ON BUSINESS PERFORMANCE OF

MANUFACTURING COMPANY.

CASE STUDY: BRALIRWA LTD.

A Thesis Submitted to the

Coordination of MBA program

Faculty of Economic Sciences and Management

In Partial Fulfillment of the Requirements for the Degree of

Master of Business Administration, Option of finance

UWAJENEZA Angelique

MBAKG/00036

Word count: 18,275

Supervised by Dr NDAYIZEYE Gervais

December, 2014

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 CERTIFICATION

The undersigned certify that UWAJENEZA Angelique has read and hereby recommend for

acceptance by the INILAK the thesis entitled the Effect of Ratio Analysis on Business

Performance in fulfillment of the requirements for the degree of Master of Business

Administration from the Coordination/Faculty.

Signature

Dr NDAYIZEYE Gervais

Date....

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 DECLARATION

I UWAJENEZA Angelique hereby declare that this thesis is my own original work. To the

best of my knowledge it contains no materials previously published or written by another

person, nor material which to a substantial extent has been accepted for the award of any

other degree or diploma at the INILAK or any other institution, except where due

acknowledgement is made in the thesis. Any contribution made to the research by others,

with whom I have worked at INILAK or elsewhere is explicitly acknowledged in the thesis.

I also declare that the intellectual content of this thesis is the product of my own work, except

to the extent that assistance from others in the thesiss design and conceptions or in style,

presentation and linguistic expression is acknowledged.

Signature: ..

Date

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 COPYRIGHT

No part of this thesis may be reproduced, stored in any retrieval system, or transmitted in

any form or by any means without prior written permission of the author or the

Coordination/Faculty at INILAK.

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 DEDICATION

I dedicate this thesis to my beloved husband and son and to my parents, brothers and sisters.

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 ACKNOWLEDGEMENT

Above all I say thank you to the Almighty God for giving me the energy and health during

the entire period of my study. All glory and honor are unto your name.

Much appreciation and thanks to my supervisors; Dr NDAYIZEYE Gervais who advised and

guided me through each and every step of this study. His comments and positive criticism are

worth the quality of this work. I also acknowledge the staff of the Department of MBA for

their wonderful academic support during my study.

I further owe warmest gratitude to my beloved husband Ernest UWIMANA for moral

support and opportunity cost made to make my studies possible. Recognition is extended to

all my family, friends and relatives and my colleagues who in one way or another contributed

to the successful completion of my studies.

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 ABSTRACT

Ratios are most widely used tools of financial analysis; they provide clues to and

symptoms of underlying conditions. Like other analysis tools, ratios are usually future

oriented, and it helps accountant analysts to uncover conditions and trends difficult to detect

by inspecting individual components making up the ratio. The thesis is about the effect of

financial ratios on business performance, case study: BRALIRWA ltd.

The main data was collected from the annual financial reports of BRALIRWA ltd

from 2009 to 2013. This data was published by BRALIRWA on its website. Different

financial ratio are evaluated such liquidity ratios, asset management ratios, profitability ratios

and debt management ratios. Using the financial data published by BRALIRWA, the effect of

ratios analysis was studied with the help of mathematical calculation for ratio analysis of

BRALIRWA ltd using Microsoft office excel 2007.

Based on the result of financial analysis, BRALIRWA ltd is profitable but not

liquidable. The liquidity ratio analysis of the company reflects that BRALIRWA ltd short-

term debt paying ability was not sufficient as well as the ratio shows the companys

incapability to meet unexpected needs of cash in accounting periods 2009-2013.

The BRALIRWA ltd must be responsible to develop their liquidity position because

the liquidity maintains its healthy position otherwise it can face financial problem and there

are other some proposed recommendations to improve the companys financial situation.

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 TABLE OF CONTENTS
CERTIFICATION...................................................................................................................................i
DECLARATION...................................................................................................................................ii
COPYRIGHT.......................................................................................................................................iii
DEDICATION......................................................................................................................................iv
ACKNOWLEDGEMENT.....................................................................................................................v
ABSTRACT.........................................................................................................................................vi
TABLE OF CONTENTS.....................................................................................................................vii
LIST OF TABLES................................................................................................................................ix
LIST OF ABREVIATION.....................................................................................................................x
CHAPTER 1: GENERAL INTRODUCTION.......................................................................................1
1.0 Introduction.................................................................................................................................1
1.1 Background of the Study.............................................................................................................1
1.2 Statement of Problems.................................................................................................................3
1.3 Research Questions......................................................................................................................4
1.4 Research Objectives.....................................................................................................................4
1.5 Research Hypothesis....................................................................................................................4
1.6 Significance of the Study.............................................................................................................5
1.6.1. To the researcher..................................................................................................................5
1.6.2. To the BRALIRWA ltd.........................................................................................................5
1.7 Conceptual Framework................................................................................................................6
1.8 Scope of the study........................................................................................................................6
1.9 Limitations of the Research.........................................................................................................7
1.10 Definition of Keys Terms...........................................................................................................7
CHAPTER 2: REVIEW OF RELATED LITERATURE AND STUDIES............................................9
2.0. Introduction................................................................................................................................9
2.1. Conceptual Framework...............................................................................................................9
2.1.1. Concept of financial statement.............................................................................................9
2.1.2. The importance of financial statement...............................................................................10
2.1.3 Types of financial statements..............................................................................................12
2.1.4. Users of financial information...........................................................................................15
2.1.5. Tools of financial statement analysis..................................................................................17
2.1.6 Financial Ratio Classification.............................................................................................19
2.1.7 Advantages and disadvantage of ratio analysis...................................................................25

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 2.1.8 Business Performance.........................................................................................................28
2.2. Theoretical Study......................................................................................................................34
2.2.1. Financial statement analysis...............................................................................................34
2.3.3. Usefulness of financial ratios.............................................................................................35
2.2.4. Steps to effectively financial ratios....................................................................................36
2.2.5. Business performance management...................................................................................38
2.3 Empirical Study.........................................................................................................................39
CHAPTER 3: RESEARCH METHODOLOGY..................................................................................44
3.1 Introduction...............................................................................................................................44
3.3 Research Design........................................................................................................................45
3.4 Population and Sampling Techniques........................................................................................45
3.4.1. Population and sample method..........................................................................................45
3.4.2. Research instruments.........................................................................................................46
3.5. Methods of Data Collection......................................................................................................46
3.6 Data Analysis Techniques..........................................................................................................46
3.7 Ethical considerations................................................................................................................47
CHAPTER 4: PRESENTATION OF FINDINGS, ANALYSIS AND INTERPRETATION................48
4.1 .Liquidity ratio...........................................................................................................................48
4.2 Asset management ratios...........................................................................................................51
4.3. Profitability Ratio.....................................................................................................................54
4.4. Leverage ratios.........................................................................................................................57
4.5. Justification of Hypothesis........................................................................................................58
CHAPTER 5: CONCLUSION AND RECOMMENDATION.............................................................62
5.1 Conclusion.................................................................................................................................62
5.2 Recommendations......................................................................................................................64
REFERENCES:...................................................................................................................................66
APPENDICES.....................................................................................................................................70

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 LIST OF TABLES
Table 1: Liquidity ratios............................................................................................................................37
Table 2: Asset management ratios..............................................................................................................40
Table 3: Profitability ratios........................................................................................................................42
Table 4: Leverage ratios............................................................................................................................44

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 LIST OF ABREVIATION

APP: Average Payment Period

BA: Business Analytic

BPM: Business Performance Management

BRALIRWA: Brasseries et Limonaderies du Rwanda

CPM: Corporate Performance Management

DSI: Days Sales Inventory

FASB: Financial Accounting Standards Board

GAAP: Generally Accepted Accounting Principles

INILAK: Independent Institute of Lay Adventists of Kigali

RMA: Risk Management Association

ROA: Return on Assets

ROE: Return on Equity

SEC: Securities and Exchange Commission

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 CHAPTER 1: GENERAL INTRODUCTION

1.0 Introduction

In this chapter, we present the background of the thesis followed by the problem

statement. The discussion also contains the motivation for our thesis. Finally, we present the

research question, the purpose of this thesis and limit the area of the study.

1.1Background of the Study

Financial statement analysis is an aspect of the overall business finance function that

involves examining historical data to gain information about the current and future financial

health of the company. Financial analysis can be applied in wide variety of situation to give

business managers the information they need to make critical decision. The financial

statement analysis refers to an assessment of the performance, viability, stability, and

profitability of a business, sub- business or project. Financial analysis is of the great

importance of chief executive officers and all other stakeholders of the business as well

(Lionel, 1987).

Financial statements provide business owners with the basic tools for determining

how well their operations perform at all times. Many entrepreneurs do not realize that

financial statements have a value that goes beyond their use as supporting documents to loan

applications and tax returns .These statements are concise reports designed to summarize

financial activities for specific periods. Owners and managers can use financial statement

analysis to evaluate the past and current financial condition of their business, diagnose any

existing financial problems, and forecast future trends in the firms financial position.

Diagnosis determines the causes of the financial problems that statement analysis uncovers

and suggests solutions for them (Reeves, 2011).

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 Ratio analysis is used for easily measurement of liquidity position, asset management

condition and profitability of BRALIRWA ltd for performance evaluation. It analyzes the

company use of its assets and control of its expenses. It determines the greater the coverage

of liquid assets to short-term liabilities and it also compute ability to pay company monthly

mortgage payments from the cash generate. It measures company overall efficiency and

performance. It also used to analysis the company past financial performance and to

establish the future trend of financial position (Own, 2012).

Generally, the financial performance of the companies and other institutions should be

measured using a combination of financial ratio analysis. The two key reports for all sizes

and categories of business are the Balance Sheet and the Income Statement. The Balance

Sheet is an itemized statement that lists the total assets and the total liabilities of a business,

and gives its net worth on a certain date (such as the end of a month, quarter, or year). The

Income Statement records revenue versus expenses for a given period of time (Kalem, 2012).

A periodic evaluation is needed, after resources have been invested, to report what has

been achieved, to examine amount of the profit, or the extent of the loss, and to consider the

effect of implementing the plan on the financial statement of the business, in particular to

note whether financial stability has been maintained or alternatively the extent to which it has

been impaired. Information on all these aspect of the finances of the business is needed to

permit management to assist the quality of past decisions at strategic level and the

effectiveness with which they have been implemented (Gitman, 2009(

Business performance management (BPM) describes a class of tools and services that

enable managers to use the insights they gain from business analytics (BA) to derive

strategies, change policies, and make adjustments to behaviors. If some measured

characteristic can be adjusted in the interest of improving the business outlook, then its

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BPM that enables this to happen. Business performance management is a set

of management and analytic processes that enables the management of an organization's

performance to achieve one or more pre-selected goals. Synonyms for "business performance

management" include corporate performance management (CPM) and enterprise

performance management (Scott, 2013).

1.2 Statement of Problems

The management of enterprise is depending on financial information for taking

various strategic decisions. Financial statements provide such information. This information

is made useful by analyzing and interpretation of financial statements with help of financial

analysis techniques among which the common and easy technique to use is financial ratios

also known as accounting ratios. (Prof. Harvey B. Lermack, 2003).

(James C. Van Horne and John M. Wachowicz, 2005: 132) say to evaluate the firm's

financial condition and performance, the financial analysis needs to perform checkups on

various aspects of a firm's financial health. A tool frequently used during these checkups is

financial ratios.

Accounting ratios are important tools in the management for decision making. (R.K.

Sharma, Shashi K. Gupta, 2001: 4.4), financial statements are prepared primarily for decision

making, but the information provided in financial statements is not an end in itself and no

meaningful conclusion can be drawn from these statements alone. Ratio analysis helps in

making decisions from the information provided in these financial statements. Thus, the

proper use of accounting ratios assists management in communicating information which is

pertinent and purposeful for decision makers to ensure the effectiveness of management in

the enterprise. In modern business environment, which is becoming more competitive, the

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survival of firms, be it small or large; depend upon the strategic decisions made by

management. This is however done with the help of accounting ratios, which is a big

challenge to most countries having shortage of professional accountants as it is the case to

our country.

As such, this study is aimed at finding out the effect of ratio analysis on business

performance of manufacturing company. Cases study: BRALIRWA ltd.

1.3 Research Questions

The research study aimed at finding out the solution for the following questions:

1. What is the importance of using financial ratios in measuring business performance?

2. What different financial ratios used in measuring business performance?

3. What the suggestions for further improvement?

1.4 Research Objectives

The main objective of the study will be to assess the extent to which the financial ratio

analysis contributes to the performance of business BRALIRWA ltd. The specifics objectives

are:

1. To understand the importance of using financial ratios in measuring business performance

2. To identify the different financial ratios used in measuring business performance.

3. To provide suggestions for further improvement.

1.5 Significance of the Study

The study is of paramount importance to the researcher, BRALIRWA ltd, other researcher and

Government

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1.5.1. To the researcher

To the researcher, this study enabled him to obtain a perfect knowledge on the impact of ratio

analysis of BRALIRWA ltd.

1.5.2. To the BRALIRWA ltd

It will be easier for the company to measure their financial soundness, finding out the factors

and their impacts of financial performance and measures will be taken depending on its

severity. The research also highlights suggestions and recommendation on how it can

improve its performance.

1.5.3. To the others researchers and INILAK community

This study will serve as literature to others researcher and INILAK community in general, but

specifically it will assist student who will be interested in same area.

1.5.4. To the government

The findings and recommendations of the researcher will help in building a strong and better

accounting practices that will help in the assessment of business performance in RWANDA,

if taken seriously by government and the general public.

1.6 Conceptual Framework

A conceptual framework is an analytical tool with several variations and contexts. It

is used to make conceptual distinctions and organize ideas. Strong conceptual frameworks

capture something real and do this in a way that is easy to remember and apply.

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 Ratio analysis
Business
performance

Liquidity ratios
Effectiveness
Asset management
ratios
Efficiency
Liquidity ratios

Leverage ratios
Financial
Profitability ratios
viability

1.7 Scope of the study

This study was conducted in BRALIRWA ltd. Under this study, the financial

statement of the cooperatives and companies namely (Balance sheets and income statements)

of five financial years 2009-2013 were considered to determine the financial position of

BRALIRWA ltd. In this study, the ratios of liquidity that will be used are current ratio, quick

ratio and cash ratio. Asset management ratio is quantify into five categories for BRALIRWA

company such as account receivable turnover, average collection period, inventory turnover,

account payable turnover and account payable turnover in days and debt coverage ratio

includes debt to total assets and debt to total equity. The profitability ratios that will be used

are net profit ratio, return on equity, net profit margin, gross profit margin and operating

profit margin.

1.8 Limitations of the Research

In the course of research, the researcher met some problems. However, she tried to by

all means to minimize the effects of those problems that culminate the success of this study.

The bellows are some of the limitations encountered and how they were controlled: Mostly,

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the financial statements are prepared on the concept of historical costs. They do not reflect

the values in terms of current costs. Such information might cause misunderstandings. The

financial statements were as interim reports and not final because of preparation of one year

or sometimes half yearly. While the actual profit or loss could only be known when the

business is closed down. To overcome of these limitations the researcher did all possible to

minimize the consequences that may result from them. She tried to minimize cost and find

other resources from family and relatives and over worked day and night.

1.9Definition of Keys Terms

Ratios analysis has been used to assess company performance for almost as long as modern

share markets have been around.

Business performance: is a set of management and analytic processes that enables the

management of an organization's performance to achieve one or more pre-selected goals.

Liquidity: is the ability of a firm to meet its short term obligations.

Profitability: is a measure of the amount by which a firms revenues exceeds its relevant

expenses.

Leverage ratios provide an indication of a companys long-term solvency.

Activity ratios are used to measure the relative efficiency of a firm based on its use of its

assets, leverage or other such balance sheet items.

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 CHAPTER 2: REVIEW OF RELATED LITERATURE AND

STUDIES

2.0. Introduction

This chapter includes what other researchers have written about financial statement

analysis, the concepts and other terms related to the researcher topic. This entails mainly the

definitions and all the necessary details about the financial ratios, and companys

performance, their analysis and interpretation. This result in the fact that the financial analysis

is based on the information contained in the financial statements and the financial analysis is

all about the analysis interpretation of this information to get clear and more meaningful

understanding of the financial position of the firm which is one of the most indicators of a

companys performance.

2.1. Conceptual Framework

2.1.1. Concept of financial statement

Financial statements are most widely used and most comprehensive way of

communicating financial information about a business enterprise to uses of the information

about a business enterprise to uses of information provided on the reports. Different uses of

financial statements have different information needs. General- purpose financial statements

have been developed to meet the needs of uses of financial statements, primarily the needs of

investors and creditors (Charles, 1993).

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2.1.2. The importance of financial statement

As stated by Reeves, (2011) financial decisions are typically base on information

generated from the accounting system. Financial management stockholders, potential

investors and creditors are concerned with how well the company is doing. The three reports

generated by the accounting system and include in the company annual report are the balance

sheet, income statement and statement of cash flows. Although the form of these financial

statements may vary among different business or other economic units, their basic purpose do

not change.

The balance sheet portrays the financial position of the organization at particular point

in time. It shows what you own (assets) how much you owe to vendors and lenders

(liabilities) and what is left (assets minus liabilities known as equity or not worth) A balance

sheet equation can be started as: Asset-liabilities= stockholders equity. The income statement,

on the other hand, measures the operating performance for a specified period of time. If the

balance sheet is a snapshot the income statement serves as the bridge between two

consecutive balance sheets. Simply put balance sheet indicates the wealth of your company

and income statement tells you how your company did last year. The balance sheets and

income statement tell different thing about company. The fact company made a big profit last

year does not necessarily mean it is liquid (has the ability to pay current liabilities using

current assets) or solvent (non current assets are enough to meet noncurrent liabilities) (Jae,

2008).

Information from financial statements is necessary to prepare federal and state income

tax returns. Statements themselves need not be filed. Prospective buyers of a business will

ask to inspect financial statements and the financial/operational trends they reveal before they

will negotiate a sale price and commit to the purchase. In the event that claims for losses are

submitted to insurance companies, accounting records (particularly the Balance Sheet) are

9
necessary to substantiate the original value of fixed assets. If business disputes develop,

financial statements may be valuable to prove the nature and extent of any loss. Should

litigation occur, lack of such statements may hamper preparation of the case. Whenever an

audit is required--for example by owners or creditors--four statements must be prepared: a

Balance Sheet (or Statement of Financial Position), Reconcilement of Equity (or Statement of

Stockholders Equity for corporations), Income Statement (or Statement of Earnings), and

Statement of Cash Flows. A number of states require corporations to furnish shareholders

with annual statements. Certain corporations, whose stock is closely held, that is, owned by a

small number of shareholders, are exempt. In instances where the sale of stock or other

securities must be approved by a state corporation or securities agency, the agency usually

requires financial statements. The Securities and Exchange Commission (SEC) requires most

publicly held corporations (such as those whose stock is traded on public exchanges) to file

annual and interim quarterly financial reports (Deltacpe, 2014).

2.1.3 Types of financial statements

Financial Statements represent a formal record of the financial activities of an entity.

These are written reports that quantify the financial strength, performance and liquidity of a

company. Financial Statements reflect the financial effects of business transactions and

events on the entity. The four main types of financial statements are:

2.1.3.1. Income statement

The income statement provides a financial summary of the firms operating results

during specific period. Most common are income statement covering one year period ending

at specific date, ordinary December 31st of the calendar year. In addition monthly statement is

typically prepared for used by the management, and quarterly statements must make available

to the stockholders of publicly held corporations. The recognition measurement and reporting

10
of business income and its components are considered by many to be the most important

tasks of accountants (Alfred, 2013).

The uses of financial statements that must make decision regarding their relationship

with the company are always concerned with a measure of its success in using the resources

committed to its operation. Has the activity been profitable? What is the trend of

profitability? Is it increasing profitability or is there a downward trend, what is the most

probable result for future years? Will the company be profitable enough to pay interest on its

debt and dividends to its stockholders and still grow at a desire rate (Shim, 2008)?

2.1.3.2. The balance sheet

The balance sheet presents a summary of the firms financial position at a given point

in time. Which are the debts of the firm; and stockholders equity, which are the owners

interests in the firm? The income statement, however, tells part of the financial story; it does

not answer question such as: what is the company doing with its income? How is the

company being financed? How in debt is the company? And how liquid are its assets? To

answer these equations, an external uses has consider the balance sheet or statement of

financial position. The balance sheet is composed of assets and Liabilities (Alfred, 2013).

2.1.3.3. Statement of cash flows

In financial accounting, a cash flow statement, also known as statement of cash flows

or funds flow statement, is a financial statement that shows how changes in balance sheet

accounts and income affect cash and cash equivalents, and breaks the analysis down to

operating, investing, and financing activities. The statement of cash flows provides a

summary of the cash flows over the period of concern, typically the year just ended. The

primary purpose of the statement of cash flows is to provide information about cash receipts

11
and cash payments of an entity during a given period. The statement can be prepared

frequently (monthly, quarterly) and is a valuable tool that summarizes the relationship

between the Balance Sheet and the Income Statement (Gitman, 2009(

Many small business owners and managers find that the cash flow statement is

perhaps the most useful of all the financial statements for planning purposes. Cash is the life

blood of a small business if the business runs out of cash chances are good that the business

is out of business. This is because most small businesses do not have the ability to borrow

money as easily as larger business can.

According to the FASB, The information provided in the statement of cash flows, if

used with the related disclosures and information in other financial statements should help

investors, creditors and others to assess an entitys ability to generate positive future net cash

flows, and to meet its current and long term obligations, including possible future dividend

payments.

Essentially, the cash flow statement is concerned with the flow of cash in and cash out

of the business. The statement captures both the current operating results and the

accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows

is useful in determining the short-term viability of a company, particularly its ability to pay

bills. By understanding the amounts and causes of changes in cash balances, the entrepreneur

can realistically budget for continued business operations and growth. For example, the

Statement of Cash Flows helps answer such questions as: Will present working capital allow

the business to acquire new equipment, or will financing be necessary? (Harrington, 1993).

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2.1.4. Users of financial information

There are various parties who hold vested interest in an organization and hence

require the formation provided by financial statements to ensure the security of the interests.

These parties will also need financial statement information to facilitate decision making,

monitoring of management or to interpret contracts and agreements that include provisions

based on such information (Forza, 2000).

Forza, (2000) described the following users of financial information who are:

shareholders, managers, directors, external auditors, suppliers of long term debt and financial

institution, government, competitors, recruiter and consultants, trade unions, investors, the

public, creditors, banks.

Shareholders: Shareholders are those people who invest in the company, require

information for share trading decisions and for generally evaluating the performance of the

organization. As they are the owners of the company, they also interested in how the directors

are managing it on their behalf and the amount of dividend they will receive.

Managers: The managers are interested in the overall performance of organization.

Managers are likely to be interested in information about their own part of the organization

and will find management accounting information particularly useful. This helps managers to

measure the effectiveness of its policies and decisions, determine the the advisability of

adopting new policies and procedures and documents to owners the results of managerial

efforts as it is their overall responsibility to see that the resources of firm are used efficiently

and effectively(Vieira, 2010).

Directors: As elected representatives of the shareholders, they are responsible for protecting

the share holders interests by vigilantly overseeing the companys activities This demands an

understanding and appreciation of financing investing, and operating activities both business

13
analysis and financial statement analysis aid directors in fulfilling their oversight

responsibilities.

External auditors: The product of an audit is an expression of opinion on the fairness of the

clients financial statements. At the completion of an audit, financial statement analysis can

serve as a final check on the reasonableness of financial statement as a whole. Auditors also

use credit analysis in evaluating the ability of their client to remain a going concern

(Petkov, 2012).

Suppliers of long term debt and financial institution: They can ascertain on the basis of

interest coverage ratio. Whether the company will pay interest regularly or not, and on the

basis of the debt equity ratio. They can examine the capital structure of the company to

ascertain whether the company will be able to repay their loan and the principal according to

its terms and to know the relationship between the various sources of funds (Hossan, 2010).

Government: The government needs information to estimate the effects of existing and

proposed taxation and other financial and economic measures. It also needs information to

estimate economics trends, such as the likely balance of payment figure.

Competitors: They want a scoop on profitable lines business and profit margins, so they can

perhaps come in to compete. Management wants to conceal sensitive information, but

generally err on the side of concealing information helpful to investors (Petkov, 2012).

Recruiter and consultants: They want consulting gigs to asses companies and industries

hire away the best managers and generally milk the cash cow that a long corporation.

14
Trade unions: They are interested in the stability and profitability of organization they are

working in. The techniques of financial statement analysis are useful to trade unions in

collective bargaining negotiations (Wild 2008).

Investors: This group is concerned with the firms earnings, they concentrate on the analysis

of the firms present and future financial structure and at which extend it influences the firms

earnings ability and risk (Vieira, 2010).

The public: The public may wish to have information about the role of the organization as an

employer, its contributions to political and charitable groups, and the impact of its activities

on the balance of trade (Wild 2008).

Creditors: Creditors will normally be suppliers who will be interested to see if the firm is

meeting its demands and in a position to pay its suppliers. Future contracts could depend on

such issues.

Banks: Banks are interested in the financial information published by the firm as they will

gain insight into how capable the firm is of paying back any loans or mortgages they may

have currently with the lender(Hossan, 2010).

2.1.5. Tools of financial statement analysis

As stated by Harrington, (1993) they are three important sets of techniques or tools

for financial statement analysis:

Comparative of financial statement analysis: Individuals conduct comparative

financial statement analysis by reviewing consecutive balance sheet, income statements of

cash flows period to period. This usually involves a review of changes in individual account

balances on year to-year or multi year basis. The most important information often revealed

comparative financial statement analysis is trend. A comparison of statement over several

15
periods can reveal the direction, speed, and extent of a trend. Comparative analysis also

compares trends in related items. Comparative financial statement analysis also is referred to

as horizontal analysis given the left-right or right analysis of account balances as review

comparative statements (Houston, 2009).

Common size financial statement analysis: The figures reported in financial

statement under this kind of analysis are converted into percentages to some common base

specifically, in analyzing a balance sheet; it is common to express total assets (or liabilities

plus equity) as 100 percent. Then accounts within these groupings are expressed as a

percentage of their respective total. In analyzing an income statement, sales are often set at

100 percent with the remaining income statement accounts expressed as a percentage of sales.

Since the sum of individual accounts within groups is 100 percent, this analysis is said to

yield common-size financial statements. This procedure also is called given the up-down (or

down-up) evaluation of accounts in common size statement is useful in understanding the

internal makeup of financial statement (Kalem, 2012).

Temporal comparisons of a companys common-size statement are useful in revealing

any proportionate changes in accounts within groups of assets, liabilities, expenses, and

others categories. Common-size statements are especially useful for intercompany

comparison because financial statements of different companies are recast in common size

format. Comparison of a companys common size statements with those of competitors, or

with industry averages, can highlight differences in account make up and distribution (Own,

2012).

Financial ratio analysis: Financial ratio analysis has been used to assess company

performance for almost as long as modern share markets have been around. The methods are

based on tried-and-true accounting ratios which have been around for even longer. The theory

16
of financial analysis was first popularized by BINJAMIN GRAHAM who is considered by

many to be father of fundamental analysis. BINJAMIN GRAHAM, who from 1928 was a

professor at Colombia business school as well as a very successful investor in his own right,

was mentor and teacher to warren Buffett (Tavakkoli, 2010).

Ratios are most widely used tools of financial analysis, due to they provide clues to

and symptoms of underlying conditions. Like other analysis tools, ratios are usually future

oriented, and it helps accountant analysts to uncover conditions and trends difficult to detect

by inspecting individual components making up the ratio. Besides, a ratio expresses a

mathematical relation between two quantities. It can be expressed as a percent, rate as well as

proportion. Moreover, usefulness of a ratio analysis fully depends on a users skillful

interpretation. The ratio analysis can be used to evaluate three fundament qualities of a

company: liquidity, solvency and profitability. (Wild 2008

2.1.6 Financial Ratio Classification

Financial ratio can be grouped into four types (liquidity, efficiency, Investment, and

profitability). No one ratio gives us sufficient information by which to judge the financial

condition and performance of the firm. Only when we analyze a group of ratios are we able to

make reasonable judgments.

2.1.6.1 Liquidity ratio

Liquidity ratios measure your company ability to cover its expenses. The two most

common liquidity ratios are the current ratio and quick ratio. Both are based on balance sheet

(Foster, 2009).

Current ratio: According to Handan, (2009) the current ratio measures a companys ability

to repay short-term liabilities such as accounts payable and current debt using short-term

17
assets such as cash, inventory and receivables. Another way to look at it would be the value

of a companys current assets that will be converted to cash over to the next twelve months

compared to the value of liabilities that will mature over the same period. The current ratio is

useful as it shows whether a company has adequate resources to repay short-term debt or if it

will experience cash flow problems in the near term.

Current ratio=

Generally a current ratio of two times or 2:1 is considered to be satisfaction. The current ratio

gives the margin by which the value of the current assets may go down without creating any

payment problem for the firm. This represents a margin of safety for liabilities. A lower

current ratio means that company may not be able to pay its bills on time, while a higher ratio

means that company has money in cash or safe investment that could be put to better use in

the business.

Quick ratio or acid-test: The quick ratio, also known as the acid test-ratio, is a

conservative variation of the current ratio, the quick ratio measures a companys immediate

debt-paying ability only cash, receivable, and current marketable securities (Quick assets) are

included in the numerator. Less liquid current assets, such as inventories and prepaid

expenses, are omitted. Inventories may take several months to sell, prepaid expenses reduce

otherwise necessary expenditures but do not lead eventually to cash receipts (Lionel, 1987).

The quick ratio is computed as follows:

Quick ratio=

18
Cash ratio: Since cash is the most liquid asset, a financial analyst may examine the cash

ratio and its equivalent to current liabilities. Trade investment or marketable securities are

equivalent to cash and may therefore included in computation of cash ratio. (Harrington,

1993).

. Cash ratio

2.1.6.2 Asset management ratios

According to Jennings, (2001) activity ratios are also called turnover ratios. Activity

ratios are employed to evaluated the efficiency with which the firm managers and utilizes its

assets. They indicate the efficiency or speed with which the capital employed is being

converted or turnover into sales. Activity ratios, thus, involve a relationship between sales

and assets. A proper relationship between sales and assets generally reflects that assets are

managed well. Several activity ratios can be calculated to judge the effectiveness of assets

utilization. Higher the rate of turnover ratio indicates the greater profitability and better use

of capital.

Inventory turnover ratio: The inventory turnover ratio, is a test of efficient inventory,

management, and indicates the speed with which the stock is being sold.

Inventory turnover ratio=

This higher inventory turnover ratio, the better it is, that is, quick movement of stock and

lower ratio indicated slow movement of stock, which means locking up of working capital.

19
The concept of inventory turnover ratio can be extended to find out the number of days of

inventory holding (Jennings, 2001).

IHP=365/Inventory turnover ratio

Receivable turnover ratio: The receivable turnover ratio attempts to throw light on the

collection and credit policies of the firm. The receivable turnover ratio reveals the velocity of

receivables. It also indicates as to how good the debtors are. It is calculated as follows

Receivable turnover ratio=

The higher the ratio indicates that debtors are good and debt collected is working efficiently.

Evaluation of receivable turnover ratio can be made better and meaningful in term of average

collection period, which is calculated as follows:

Average collection period=

It indicates how quickly and efficiently the debts are collected. The shorter the period, the

better it is and longer the period, the chance of bad debts (Maheshwari, 2009).

Payable turnover ratio: It shows the velocity of debt payment by the firm. It is calculated as

follows:

Payable turnover ratio:

This can be supplemented by the average payment period

20
The average payment period:

This can be meaningfully evaluated by comparing it with the credit period allowed by the

supplies. To the extent possible, a firm should try to maintain the APP, Which is

approximately equal to the credit terms of the supplier. It improves goodwill and credit

worthiness of the firm in the market (carcello, 2008).

2.1.6.3 Solvency ratios

Leverage ratios, also referred to as gearing ratios, measure the extent to which a

company utilizes debt to finance growth. Leverage ratios can provide an indication of a

companys long-term solvency. Whilst most financial experts will acknowledge that debt is a

cheaper form of financing than equity debt carries risks and investors need to be aware of the

extent of this risk. Leverage ratios may be calculated from the balance sheet items to

determine the proportion of debt in total financial. They are also computed from the profit

and loss account items by determining the extent to which operating profits are sufficient to

cover the fixed charges (Joel, 2009).

Debt to Equity ratio: The debt to equity ratio provides an indication of companys capital

structure and whether the company is more reliant a borrowing (debts) or shareholders capital

(equity) to fund assets and activities. Contrary to what many believes, debt is not necessarily

a bad thing. Debt can be positive, provided it is used for productive purposes such as

purchasing assets and improving process to increase not profit. Acceptable debt to equity

ratios may also vary across industries. Generally, companies that are capital intensive tend to

21
have higher ratios because of the requirement to invest more heavily in fixed assets (Schall,

1986).

Debt to total equity Ratio = Total liabilities / Total equity *100

Debt to total assets ratio measures the percentage of a companys assets that are financed by

debt. It is computed by dividing total liabilities by the total assets. (Edmonds et al. 2006)

Debt to total assets ratio = Total debts/ Total assets *100

2.1.6.4 Profitability ratios

Profitability ratios measure a company performance and provide an indication of its

ability to generate profit. As profits are used to fund business development and pay dividends

to shareholders a companys profitability and how efficient it is at generating profits is an

important consideration for shareholders (Kimmel, 2002).

Gross profit margin: Gross profit margin tells us what percentage of a companys sales

revenue would remain after deducting the cost of goods sold. This is important as it helps to

determine whether the company would still have enough funds to cover operating expenses

such as employee benefits, lease payments, advertising and so forth. A companys gross profit

margin may also be viewed as a measurement of production efficiency. A company with a

gross profit margin higher than that of its competitors or industry average is deemed to be

more efficient and is therefore all things being equal preferred (Schall, 1986)

Gross profit margin=

22
Net profit margin : Net profit margin meanwhile indicates what percentage of a companys

sales revenue would remain after all costs have been taken into account. This is best

compared with other companies in the same industry and analyzed overtime. Considering that

variations from year to year may be due to abnormal condition to explain this further, a

declining net profit margin ratio may indicate a margin squeeze possibly due to increased

competition or rising costs (Keiso, 2002).

Net profit Margin=

Return on assets: Return on assets, commonly referred to as ROA.Is a measurement of

management performance. ROA tells the investor how well a company uses its assets to

generate income. A higher ROA denotes a higher level of management performance. Arising

ROA, for instance may initially appear good, but turn out to be unimpressive of the

companies in its industry have been posting higher returns and greater improvements in

ROA. The ROA ratio may thus be more useful when compared to the risk free rate of return.

Technically, a company should produce on ROA higher than the risk free rate of return to be

rewarded for the additional risk involved in operating the business. If a companys ROA is

equal or even less than free rate, investors should think twice as they would be better off just

purchasing a bond with guaranteed yield (Harrington, 1993).

Return on assets

Return on equity (ROE): Return on equity, commonly referred as ROE. Is another

measurement of management performance.ROE tells the investor how well a company has

23
used the capital from its shareholders to generate profits. Similar to the ROA ratio; a higher

ROE donates a higher level of management performance (Foster, 2009).

Return on equity = Net income / Common stockholders equity*100

2.1.7 Advantages and disadvantage of ratio analysis

2.1.7.1 Advantage of ratio analysis

Simplifies financial statements: ratio analysis provides data for inter-firm

comprehension of financial statements. Ratio tells the whole story of changes in financial

condition of the business. Facilitates inter-firm comparison: ratio analysis provides data for

inter-firm comparison. Ratios highlight the factors associated with successful firms. They

also reveal strong firms and weak firms, over valued firms. Makes intra-firm comparison

possible: ratio analysis also makes possible comparison of the performance of different

division of the firm. The ratio is helpful in deciding about their efficiency or otherwise in the

past and likely performance in the future helps in planning: Ratio analysis helps in planning

and forecasting. Over a period of time a firm or industry develops certain norms that may

indicate future success or failure. If relationship changes in firms data over different period

may provide clues on trends and future problems. Thus ratios can assist management in its

functions of forecasting, planning, coordinating, controlling and communicating (Joseph,

2008).

2.1.7.2 Disadvantage of ratio analysis

While ratio analysis is obviously a very useful technique for evaluating performance,

it is subject to certain limitations that need to be considered when applying it.

Comparative study required: Ratios are useful in judging the efficiency of the business

only when they are compared with the past result of the business or with the result of similar

24
business. However, such a comparison only provides a glimpse of the past performance and

forecasts for the future may not be correct since several other factors like market conditions,

management policies

May affect future operations:

Limitation of financial statements: Ratios are used only on the information which has been

recorded in the financial statements. Because financial statement suffer from a number of

limitations, the ratios derived there from, are therefore also subject to those limitations.

Inadequacy of ratios: Ratios are only indicators and hence they cannot be taken as final

word regarding good or bad financial position of the business. Otherwise variable also have

to be considered. For example a high current ratio does not necessarily mean that company

has a good liquid position in case current assets mostly comprise outdated stocks (Eugene,

2009).

Window dressing: The presence of particular ratio may not be a definite indicator of good or

bad management. For example, a high stock turnover ratio is generally considered to be

indication of operational efficiency of the business. But this might have been achieved by

unwarranted price reductions or failure to maintain proper stock of goods. Similarly the

current ratio may be improved just before the balance sheet date by postponing replenishment

of inventory (Carcello, 2008).

Problems of price lever changes: Financial analysis based on accounting ratios will give

misleading results if the effects of changes in price levels are not taken into account. For

instance, two companies set up in different years, having plant and machinery of different

ages, cannot be compared, on the basis of traditional accounting statements. This is because

25
the depreciation charges on plant and machinery in case of the old company would be as

much lower figures as compared to the company that has been set up recently (Mark, 2008).

No foxed standards: No fixed standards can be laid down for ideal ratios. For example,

current ratio is generally considered to be ideal if current assets are twice the current

liabilities. However, in case of those entities which have adequate arrangements with their

bankers for providing funds when required, it may be perfectly ideal if current assets are

equal to slightly more than current liabilities (Suzanne, 2008).

Historical cost: As financial statements are normally prepared on historical costs basis,

unadjusted for inflation, the accounting amount are removed from economic value. This will

be reflected by the understatement of fixed assets and possibly inventory, while the value of

long term debt will decline in real terms. This results in equity being understated. These

factors make ratio comparisons overtime, for a given period less reliable than would be the

case in the absence of inflation. The above limitation does not negate the usefulness of ratio

analysis but is important to note that analysts should be aware of them and make necessary

adjustments. It may therefore be concluded that ratio analysis, if done mechanically, is not

only misleading but also dangerous as the effectiveness of the exercise depends upon the

interpretation of the ratios and hence the skills of the analyst. If an analyst appliers ratio

analysis perceptively, ratios will provide useful insight into a firms operations (Eugene,

2009).

2.1.8 Business Performance

Business performance is a multidimensional concept. There are various indicators that

can be used to assess the performance of enterprises. BPM is the abbreviation

for business performance management. It is a business management approach that entails

aspects of reviewing the overall business performance and determining how the business can

26
better reach its goals. These activities are aided by software tools, called BPM tools. BPM is

often thought of as a business strategy that enables businesses to efficiently collect, aggregate

and analyze data from various sources in order to take the most appropriate business action

(Balon, 2010).

It enables businesses to: Improve productivity, Monitor and analyze business

processes, Automate tasks, Increase efficiency, Increase effectiveness, Financial viability,

Identify cost savings opportunities, Generate new business, Measure key performance

objectives, Analyze risks, Predict business outcomes. Business performance management

requires the alignment of strategic and operational objectives to the business activities in

order to manage performance. By collecting and analyzing data, business managers are more

informed about the company's position and can make better decisions as a result (Harder,

2010).

2.2. Theoretical Study

2.2.1. Financial statement analysis

Foster, (1986) defined financial analysis as the process of identifying the financial

strengths and weaknesses of the firm by properly establishing relationship relationships

between the items of the balance sheet and profit and loss account. He father puts it that,

financial analysis can be undertaken by the management of the firm or by parties outside the

firm, viz owners, creditors, and investors. However the nature of the analysis will differ

depending on the purpose of the analyst.

Keown, (1979) defined financial analysis as one that involves the assessment of the

firms past, present and future financial condition. The objective is to identify any weaknesses

27
in the firms financial health that could lead to the future problems and determine the strength

that firm might capitalize upon. For example internally financial analysis might be aimed at

assessing the firms liquidity or measuring its past performance. Alternatively, from the

outside, the firm might be aiming to determine the firms credit worthiness or credit potential.

However, regardless of the origins of the analysis, the tools basically the same

Lawrence, (1992), asset that financial analysis and planning is concerned with

transforming financial data into a form that can be used to monitor the firms financial

condition. These functions encompass the entire balance sheet as well as the firms income

statement and underlying objective is to assess the firms historical as well as future cash

flow.

2.3.3. Usefulness of financial ratios

Financial ratios are used to determine a companys strengths and weaknesses. A

fundamental definition of any profit-seeking business is an entity that acquires resources in

order to generate profits through the production and sale of goods and/or services. Ratios

show important relationships between a firms resources and its financial flows. In a way,

ratio analysis provides a report card. If the firms managers are doing a good job, they

know it. If they are not doing a good job, not only will they know it, but they will also have a

clear understanding of what they can do about it (Burson, 1998).

A financial ratio is a number that expresses the value of one financial variable relative

to another. It is the numeric result gained by dividing one financial number by another.

Calculated this way, financial ratio allows an analyst to assess not only the absolute value of a

relationship but also to quantify the degree of change within the relationship (Lawder, 1989).

28
 Financial ratios are said as the most widely used indicators of company. It play a role

to value firms, to distinguish creditworthy companies compare to others, to identify

acquisition targets and to indicate the process of organizational in completing or the time

needed to complete a task (Al-Ajmi, 2008).

The financial analysis model known as a quite helpful tool for executives to measure

or predict enterprise bankruptcy or enterprise failure provides concerned decision-makers

(authorities) with the possibility or hoping to avoid failures. Also it becomes an early warning

system to the corporate management (Karacaer & Kapusuzolu, 2008).

Financial ratios can be used as financial indicators which allow for comparisons

between companies, between industries, between different time periods for one company,

between a single company and its industry average. Apart from that, financial ratios generally

hold no meaning unless they are benchmarked against something else, like past performance

or another company and industries. The reason behind that is the ratios of firms in different

industries, which face different risks, capital requirements, and competition are usually hard

to compare if we have no other things to compare (Marshall, 2002).

A study using financial ratios in the 1930s and several later studies were concerned

with business failure (Altman, 1971). It was ascertained that failing firms exhibited

significantly different ratio measurements than businesses which were successful. Historical

accounts specifically cite the use of ratios in predicting bankruptcy. Overall, the ratios which

measure profitability, liquidity, and solvency have prevailed as the most useful indicators for

business.

29
 According to Ketz, Doogar and Jensen (1990), financial ratio analysis is frequently

used: (a) to compare a present ratio with past and expected future ratios for the same

company or firm, and (b) to compare one firm with those of similar firms or with industry

averages at some point in time.

2.2.4. Steps to effectively financial ratios

As stated by Darrel, (2011) the basics of financial analysis usually mean calculating

different financial ratios and then coming to conclusions and clarification regarding on how

the company is financially performing in business activities. There are certain things that

must be considered before too many conclusions are drawn such as:

Firstly, understand what comprise different financial ratios before start analyzing

companys data. Must take into consideration all financial ratios numbers derived from

financial statement comprise of balance sheet and income statement. Balance sheets represent

a reflection for a particular point in time. Income statements represent a cumulative time

summary of performance. For example, year-end financial statements should include a

balance sheet that presents how various company accounts look on that particular day at the

end of the year, whereas the income statement shows how companys performance over the

period (Osteryoung & Constand ,1992).

Second is evaluating external influencing factors. As with all companies, the financial

statements can be influenced by various factors like management or owner decisions and

discretionary spending, seasonal effects, legal structure choice, type of industry, customer

mix, or a number of other issues. These factors can influence the financial statements and

will, in turn, influence the financial ratios analysis (Seaton, 1995).

30
 Third is look at internal trends. Always keep in mind is that one ratio alone tells one

very little. A clear picture starts developing when one looks at ratios over different time

increments. By comparing financial results against prior performance one gets a better idea of

what is occurring within the company. Trends will start to develop and can give insight into

areas that may need corrective attention or to areas that may need to be reinforced. Internal

trend analysis is most likely most beneficial because one is comparing similar business

situations over various periods of time (Divine, 1995).

Fourth is compare results to the industry. Comparing your business performance to

other similar businesses is a common way to judge how well the business is doing. Even

though this is very common, there are limitations to doing so. First realize these comparative

ratios represent an average. Averages are simply that and most likely your business will vary

somewhat. Next be sure you are comparing your business to other businesses similar in asset

size and sales volume. In some cases there may be no suitable comparisons. Knowing what is

the average for your industry is important. The averages can serve as a general benchmark for

your business. Additionally, these averages are often times used to compare your business

performance when you are seeking capital from outside sources such as a bank. Being

different may not be a deal killer, but not being able to explain why you are different may

indeed be a deal killer (Edmister, 1972).

2.2.5. Business performance management

The process of business performance management (BPM) focuses on three activities.

These activities include the selection of business goals, consolidating measurable information

relevant to those goals, and the participation of management to assist in improving future

performance. This process involves the gathering of large amounts of data. Commonly most

organizations have difficulties taking the collected data and transforming it into useful

31
information. Also many companies are trying to gather information from different sectors of

their organization such as finance, inventory, forecasting, and human resources eliminating

the need to use spreadsheet analysis (Cindy, 2010).

As stated by Vince, (2003) BPM systems capture and disseminate strategic

information that matters most to the firm in the form of strategic process and outcome

measurement, and most to the individuals within the firm in the form of performance

measurement, incentives and motivation. Because of this, BPM systems are a primary means

of knowing (coordinating what a firm knows and learns) and doing (how it alters what it

does). Over time, they may perhaps become the single most strategic information system

resource in the firm.

Kerssens, Drongelen & Fisscher, (2003) they observed that the Performance

measurement and reporting takes place at 2 levels: (1) company as a whole, reporting to

external stakeholders, (2) within the company, between managers and their subordinates. At

both levels there are 3 types of actors: (a) evaluators (e.g. managers, external stakeholders),

(b) evaluatee (e.g. middle managers, company), (c) assessor, which is the person or institution

assessing the effectiveness and efficiency of performance measurement and reporting process

and its outputs (e.g. controllers, external accountant audits).

As stated by Neely, (1998) a performance measurement system enables informed

decisions to be made and actions to be taken because it quantifies the efficiency and

effectiveness of past actions through the acquisition, collation, sorting, analysis,

interpretation, and dissemination of appropriate data. Organizations measure their

performance in order to check their position (as a means to establish position, compare

32
position or benchmarking, monitor progress), communicate their position (as a means to

communicate performance internally and with the regulator), confirm priorities (as a means

to manage performance, cost and control, focus investment and actions), and compel progress

(as a means of motivation and rewards).

2.3 Empirical Study

The study of Abdallah, (2008) aimed to identify whether the Jordanian industrial

companies applied the modern management accounting and to identify the most important

benefits the companies get from these methods. The results of the study showed that the most

important benefits of applying these methods is providing the administrations with the

appropriate information in appropriate time, improving the products quality and reducing the

costs.

As observed by Lionel, (1987) in his paper entitled: The Farmer's Cooperative

Yardstick: Financial Ratios Useful to Agricultural Cooperatives, he found that Sound

financial planning and management are two key elements to the successful operation of

cooperatives. Sound financing relates to the need for both equity and borrowed capital for

operations and growth. It also involves the analysis of financial data to develop financial

controls. Cooperative management should find financial ratios to be an important tool in

performing this management function.

As stated by Karacaer and Kapusuzolu, (2008) in their paper entitled: An Analysis of

the Effect of Financial Ratios on Financial Situation of Turkish Enterprises, they found that

the most highest ratios contribution in the analysis regarding them variables whose effect the

financial condition of the sample enterprise are ROE, debt ratio, net working capital, acid test

ratio, net profit ratio, cash ratio, and current ratio respectively. Among of them, the liquidity

33
ratios are the main element in these ratios. It is observed that all the variables have differing

but significant effects on the corporate financial situation.

Thachappilly (2009), in this articles he discuss about the Financial Ratio Analysis for

Performance evaluation. It analysis is typically done to make sense of the massive amount of

numbers presented in company financial statements. It helps evaluate the performance of a

company, so that investors can decide whether to invest in that company. Here we are looking

at the different ratio categories in separate articles on different aspects of performance such as

profitability ratios, liquidity ratios, debt ratios, performance ratios, investment evaluation

ratios.

Clausen (2009), He state that the Profitability Ratio Analysis of Income Statement and

Balance Sheet Ratio analysis of the income statement and balance sheet are used to measure

company profit performance. He said the learn ratio analyses of the income statement and

balance sheet. The income statement and balance sheet are two important reports that show

the profit and net worth of the company. It analyses shows how the well the company is doing

in terms of profits compared to sales. He also shows how well the assets are performing in

terms of generating revenue. He defines the income statement shows the net profit of the

company by subtracting expenses from gross profit (sales cost of goods sold). Furthermore,

the balance sheet lists the value of the assets, as well as liabilities. In simple terms, the main

function of the balance sheet is to show the companys net worth by subtracting liabilities

from assets. He said that the balance sheet does not report profits, theres an important

relationship between assets and profit. The business owner normally has a lot of investment

in the companys assets.

34
 White (2008), He refer that the accounts receivable is an important analytical tool for

measuring the efficiency of receivables operations is the accounts receivable turnover ratio.

Many companies sell goods or services on account. This means that a customer purchases

goods or services from a company but does not pay for them at the time of purchase. Payment

is usually due within a short period of time, ranging from a few days to a year. These

transactions appear on the balance sheet as accounts receivable.

Jenkins (2009), Understanding the use of various financial ratios and techniques can

help in gaining a more complete picture of a company's financial outlook. He thinks the most

important thing is fixed cost and variable cost. Fixed costs are those costs that are always

present, regardless of how much or how little is sold. Some examples of fixed costs include

rent, insurance and salaries. Variable costs are the costs that increase or decrease in ratios

proportion to sales.

As mentioned by Salmi, Timo, Dahlstedt, Martti & Laakkonen (1988), financial ratios

are commonly used for comparison of financial position intra-industry. Also, in financial

statement analysis a firm's performance and financial status are frequently evaluated in

relation to other firms in the same branch of industry or in relation to industry averages.

Jagetia has given an article in the journal Management Accountant March, 1996 on

the subject, Ratio Analysis in Evaluation of Financial Health of a Company:. The main

objective of this article was that the ratio analysis is often under-rated but extremely helpful

in providing valuable insight into a companys financial picture. He observed that the ratios

normally pinpoint business strengths and weakness in two ways-Ratios provide an easy way

to compare todays performance with the past. Ratios depict the areas in which a particular

35
business is competitively advantageous or disadvantageous through comparing ratios to those

of other business of the same size within the same industry. He concluded that the ratio

analysis should not be viewed as an end but should be viewed as a starting point. Ratios by

themselves do not answer the questions. One must look at other sources of data in order to

make a judgment about the future of the company.

Forza & Salvador, (2000), in the International Journal of Operations & Production

Management, Vol. 20, No. 3, pp. 359-385 entitled: Assessing Some Distinctive Dimensions

of Performance Feedback Information in High Performing Plants, they concluded that a

performance measurement system is an information system that supports managers in the

performance management process mainly fulfilling two primary functions: the first one

consists in enabling and structuring communication between all the organizational units

(individuals, teams, processes, functions, etc.) involved in the process of target setting. The

second one is that of collecting, processing and delivering information on the performance of

people, activities, processes, products, business units,

Ittner, Larcker & Randall , (2003),in their paper entitled: Strategic performance of a

firm, they observed that a strategic performance measurement system: (1) provides

information that allows the firm to identify the strategies offering the highest potential for

achieving the firms objectives, and (2) aligns management processes, such as target setting,

decision-making, and performance evaluation, with the achievement of the chosen strategic

objectives.

Maisel, (2001).In his book entitled: Performance Measurement Practices Survey

Results, he concluded that a BPM system enables an enterprise to plan, measure, and control

36
its performance and helps ensure that sales and marketing initiatives, operating practices,

information technology resources, business decision, and peoples activities are aligned with

business strategies to achieve desired business results and create shareholder value.

CHAPTER 3: RESEARCH METHODOLOGY

3.1 Introduction

This chapter discusses the case study profile, research design and methodology of the

study; it highlights a full description of the research design, the research variables and

provides a broad view of the description and selection of the sample and population. The

research instruments, data collection techniques and data analysis procedure have also been

pointed out.

3.2 Case Study Profile

BRLIRWA ltd

BRALIRWA, which is a part of the Heineken Group, is a proudly Rwandan company

with roots in the country that date back over 50 years to 1959 when the Companys flagship

Rwandan beer brand, Primus, was first produced in Gisenyi. BRALIRWA has since grown

into one of the largest companies in Rwanda.

37
 It seeks to play a key part throughout Rwandan society through the application of its

core values to its business: Passion for Quality, Enjoyment for Life, Respect for the People,

Society and Environment. The Companys mission is To become a world class sustainable

beverage producing company in Rwanda with high quality brands that satisfy needs and give

enjoyment to our consumers, while respecting our people, society and environment we live

in.

3.3 Research Design

Redman and Mory (1923) defined research as a systematic effort to gain new

knowledge According to Clifford Woody research comprises defining or redefining

problems, formulating hypothesis or giving solutions, collecting, organizing, evaluating the

data, making deductions and reaching conclusions and at carefully testing the conclusion to

determine whether they fit the formulating hypothesis. The research design used in this

project is a descriptive research in which events are recorded, described, interpreted, analyzed

and compared/contrasted.

3.4 Population and Sampling Techniques

3.4.1. Population and sample method

This study is based only on secondary data, there is no need of population and

sampling method.

3.4.2. Research instruments

Secondary Data

The study employed secondary data collection. Secondary data is the information

which is collected already and it is used for some other studies by different researcher. In this

study will use secondary data for the analyses of ratio in order to know the effect of ratio

38
analysis on performance evaluation of BRALIRWA ltd for the financial periods 2009 to 2013

from the annual reports maintained by the company. Data are collected from the companys

website, books and journals pertaining to the topic.

3.5. Methods of Data Collection

Data are collected from the annual financial reports of BRALIRWA ltd from 2009 to

2013. These data are published by BRALIRWA on its website. The financial statements for

ratio analysis that are used are: balance sheets and income statement of BRALIRWA ltd from

2009 to 2013.

3.6 Data Analysis Techniques

The data were collected from the financial statement of BRALIRWA after their

collection; data were processed and analyzed through ratios and Microsoft Office Excel 2007.

The analysis was on the effect of ratio analysis on the performance evaluation of BRALIRWA

and the following ratios were used for analysis: liquidity ratios, assets management ratios,

leverage ratios and profitability ratios. See appendices A, B, C, D, E, F.

3.7 Ethical considerations

According to Finnis (1983), ethics is a branch of philosophy, said to have been

initiated by Aristotle, which takes human action as its subject matter. It means that

considering the morals or the principles of morality, the right and wrong of an action, prior to

acting. Considering whether or not it is within the rules or standards of right conduct or

practice, especially the standards of a profession. (Seale et al, 2004:116). This thesis uses

only the secondary data, great care was taken to ensure that informations used correspond to

those published by BRALIRWA, there is no harmful information used.

39
 CHAPTER 4: PRESENTATION OF FINDINGS, ANALYSIS

AND INTERPRETATION

In this part we present the result from our data analysis. This part is separate into four

categories. At first, we briefly examined the performance of liquidity position of BRALIRWA

ltd. Second, we present the asset management condition of that company. Third, we

demonstrate the performance of profitably that company. Finally we discussion the debt

management position of that company.

4.1 .Liquidity ratio

Liquidity ratio refers to the ability of a company to interact its assets that is most

readily converted into cash. Assets are converted into cash in a short period of time that are

concerns to liquidity position. However, the ratio made the relationship between cash and

current liability. We use three types of liquidity ratio which are: Current ratio, Quick ratio or

acid test and cash ratio.

Table 1: Liquidity ratios

40
Source: Researchers calculation based on the financial statements. See appendices A, B, C.

The current assets may be defined as the money and other assets that are readily

convertible into cash. Cash itself is, by definition, the most liquid form of assets; other assets

having varying degree of liquidity depending on the case with which they can be converted

into cash. The current liabilities include all types of liabilities which will mature for payment

with in a period of one year such as bank overdraft, trade creditors, bills payable, outstanding

expenses, etc Generally current ratio is acceptable of short term creditors for any company.

The formula is shown as: Current Ratio which equals to Current assets over Current

liabilities. According to current ratio on the table 1, BRALIRWA ltd had 0.94 in 2009, 0.92 in

2010, 0.94 in 2011, 0.82 in 2012 and 0.74 in 2013. In 2012 and 2013 the current liabilities

had increased at high rate due to trade payable which increased up to 12 billion Rwandan

franc and loans and borrowings also had increased up to 10 billion Rwandan franc. It had a

low current ratio during analyzed five years compared to the law of thumb means that the

company has problems of paying its bills on time. Typically, BRALIRWA have a consistent

negative working capital since it has the muscle power and can demand longer credit periods

from their fragmented suppliers. Its current liabilities had increased in disproportion to

current assets.

Quick ratio or acid test ratio is estimating the current assets minus inventories then

divide by current liabilities. It is easily converted into cash at turn to their book values and it

41
also indicates the ability of a company to use its near cash. A more stringent liquidity test that

indicates if a firm has enough short-term assets (without selling inventory) to cover its

immediate liabilities. This is often referred to as the acid test because it only looks at the

companys most liquid assets only (excludes inventory) that can be quickly converted to

cash). The formula of quick ratio or acid test ratio are as follow as; Quick ratio which equals

to (Current asset- inventories) over Current liabilities. The basics and use of this ratio are

similar to the current ratio in that it gives users an idea of the ability of a company to meet its

short-term liabilities with its short-term assets. Another beneficial use is to compare the quick

ratio with the current ratio. A ratio of 1:1 means that a social enterprise can pay its bills

without having to sell inventory. Therefore, according to quick ratio on the table 1,

BRALIRWA ltd had a low quick ratio during analyzed five years. This is due to high

inventory which increased at high rate and occupied a large portion of current asset.

The cash ratio is the most stringent and conservative of the three short-term liquidity

ratios (current, quick and cash). It only looks at the most liquid short-term assets of the

company, which are those that can be most easily used to pay off current obligations. The

formula of current ratio is below as; Cash Ratio which equals to Cash over Current

Liabilities. A ratio of 1:1 means that a company has enough cash and cash equivalents to fully

cover current liabilities. The cash ratio of BRALIRWA ltd was lower than one. It means that,

in those years the company had not sufficient cash in case they faced to pay their short-term

debts by cash.

Liquidity is an attribute that signifies the capacity to meet financial obligations as and

when required. Liquidity management is a routine function of finance which deals with the

effective management of the two components of working capital, viz. the current assets and

42
the current liabilities. The importance of liquidity to meet the current obligations as and when

they become due for payment can hardly be over emphasized. In fact, liquidity is a

prerequisite for the very survival of the firm. The suppliers and short-term creditors are

interested of the short-term solvency of the firm. It is a constraint which must be satisfied

both directly, in that firms must settle their debts, and indirectly, in that they must also report

an ability to continue to do so. Liquidity has been taken as an important tool to analyze the

sustainability and liquidity position of any enterprise that may also help to derive maximum

profits at minimum cost. BRALIRWA ltd must maintain its ability to pay off its current

obligations and have a sound base of working capital to stay for a long period in the

competitive market.

The liquidity ratio of BRALIRWA ltd has shown a disorder in growth during analyzed

five years. This indicates that the growth rate of current liabilities was more as compared to

the growth rate of current assets and hence the working capital is decreasing slowly and

slowly. This aggressive approach in the working capital might be the policy of BRALIRWA

ltd to enhance the profitability but no doubt it endangers the liquidity position of the

company.

4.2 Asset management ratios

Asset management ratios are most notable ratio of the financial ratios analysis. It

measure how effectively a company uses and controls its assets. It is analysis how a company

quickly converted to cash or sale on their resources. It is also called Turnover ratio because it

indicates the asset converted or turnover into sales. Finally, we can recognize the company

can easily measurement their asset because this ratio made up between assets and sales.

43
Following are discussed seven types of asset management ratios: Accounts receivable

turnover, Average collection period, Inventory turnover, Accounts Payable turnover and

Accounts Payable turnover in days

Table 2: Asset management ratios

Source: Researchers calculation based on the financial statements. See appendices.

The Accounts receivable turnover is comparison of the size of the company sales and

uncollected bills from customers. Account receivable turnover ratio formula is; Accounts

receivable turnover which equals to Sales over Accounts receivable. The average collection

period is refers to the time taken by the customers to pay. The equation of average collection

period is following as; Average collection period which equals to 365 days over Accounts

receivable turnover .This ratio reflects how easily the company can collect on its customers.

It also can be used as a gauge of how loose or tight the company maintains its credit policies.

A particular thing to watch out for is if the Average Collection Period is rising over time. This

could be an indicator that the companys customers are in trouble, which could spell trouble

ahead. BRALIRWA ltd had average collection period which increased day by day and it is not

44
good for it. According to the information on the table above this could also indicate that

BRALIRWA ltd has loosened its credit policies with customers, meaning that they may have

been extending credit to companies where they normally would not have. This could

temporarily boost sales, but could also result in an increase in sales revenue that cannot be

recovered.

The accounts payable turnover ratio is compute by account payable to sale. It

measures the tendency of a company credit policy whether extend account payable or not.

The account payable turnover ratio equation are as follow as; Accounts Payable turnover

which equals to Sales over Accounts Payable and Accounts Payable turnover in days is

representing that the number of days of a company to pay their liability to their creditor.

Accounts Payable turnover in days which equals to 360 days over Accounts Payable turnover.

If any company number of days is more then the company is stretching account payable

otherwise the company is not holding their account payable. It evaluates the account payable

turnover by exchange into 360 days. According to the information on the table above

BRALIRWA ltd had an increasing accounts payable turnover in days. This will be good when

Bralirwa's liquidity position is good, high days payables outstanding most likely tells that the

company is delaying payments to its creditors till the last possible date to shorten its cash

conversion cycle. It highlights good working capital management. However, the liquidity

situation of BRALIRWA ltd is not good; a high DPO suggests that the company is facing

problems paying its suppliers.

The inventory turnover ratio measures the number of times on average the inventory

was sold during the period. The ratio is calculated as follow: Inventory Turnover Ratio = Cost

of Goods Sold / Average Inventory. Days' sales in inventory (DSI) are a way to measure the

average amount of time that it takes for a company to convert its inventory into sales. A

45
relatively small number of days' sales in inventory indicate that a company is more efficient

at selling off its inventory. According to the information on the table, BRALIRWA ltd had a

large number of days in inventory which indicates that a company may have invested too

much in inventory, and may even have obsolete inventory on hand. However, a large number

may also mean that management has decided to maintain high inventory levels in order to

achieve high order fulfillment rates.

4.3. Profitability Ratio

Profitability ratios designate a company's overall efficiency and performance. It

measures the company how to use of its assets and control of its expenses to generate an

acceptable rate of return. It also used to examine how well the company is operating or how

well current performance compares to past records of cooperative. There are five important

profitability ratios that we are going to analyze:

Return on Asset, Return on Equity, Net Profit Margin, Gross Profit Margin and operating

profit margin.

Table 3: Profitability ratios

Source: Reaserchers calculation based on the financial statements. See appendices.

46
 ROA tells the investor how well a company uses its assets to generate income. It is

calculated as follow: Return on Total Assets which equals to Net profits after taxes over total

assets times 100. The trend of this ratio indicates that in 2009 for 1 franc invested in fixed

and current assets the return is 0.17 on sales. Typically, this number is most useful when

using it as a historical benchmark that a company uses to measure its relative performance

against past periods. As a rule of thumb, investment professionals like to see a company's

ROA come in at no less than 5%. According to the table 3 above, BRALIRWA ltd had

decreasing ROA from 2011 to 2013 which were 29.38%, 25.53% and 16.88% respectively.

This decrease was due to a decrease in net income and an increase in assets such as high

purchases of fixed assets or poor collection of accounts receivable. A decreasing ROA

indicates less profitability. ROA is derived from Net income and assets, so to improve the

return on assets, BRALIRWA ltd has to increase Net Income without acquiring new assets or

improve the effectiveness of existing assets. In 2013 ROA was decreased up to 9% due to an

increase of net income in disproportion of total asset.

Return on Equity demonstrates how a company to generate earnings growth for using

investment fund. It has some alternative name such Return on average common equity, return

on net worth, Return on ordinary shareholders' fund. Return on common stock equity which

equals to Net income over Common stockholders equity times100. ROE tells the investor

how well a company has used the capital from its shareholders to generate profits. The return

on equity of BRALIRWA ltd has increased from 41.76% in 2009 to 74.48% in 2011 and

decreased from 63.39% in 2012 to 43.93%in 2013. It means that this decrease caused the

BRALIRWA ltd to lose its efficiency in production process and also this falls in return on

equity has a bad affect in common stock holder.

47
 The net profit margin is determined of net profit after tax to net sales. It argues that

how much of sales are changeover after al expense. Net Profit margin which equals to Net

profit after tax over sales times 100. Often referred to simply as a company's profit margin,

the so-called bottom line is the most often mentioned when discussing a company's

profitability. While undeniably an important number, investors can easily see from a complete

profit margin analysis that there are several income and expense operating elements in an

income statement that determine a net profit margin. Net profit includes non-operating

incomes and profits. Non-Operating Incomes such as dividend received, interest on

investment, profit on sales of fixed assets, commission received, discount received etc. In this

analysis we see that the net profit margin of BRALIRWA ltd has increased up to 24% in 2012

compare than other four years because the net profit and sales are increased in that year. As a

result this company is standard position.

Gross margin express of the company efficiency of raw material and labor during the

working process. A company's cost of sales, or cost of goods sold, represents the expense

related to labor, raw materials and manufacturing overhead involved in its production

process. The gross margin to sales ratio is an indication of the management's ability to mark

up its products over their cost. In 2009 the ratio was 0.41 or 41.22 that means to 1 unit sold

the cost of product sold was 0.59. This expense is deducted from the company's net

sales/revenue, which results in a company's first level of profit, or gross profit. The gross

profit margin is used to analyze how efficiently a company is using its raw materials, labor

and manufacturing-related fixed assets to generate profits. The Gross Profit Ratio of

BRALIRWA ltd was increased from 41.22% in 2009 to 52.72% in 2011 due to an increase in

gross profit such as sales higher than cost of goods sold. BRALIRWA ltd had a low gross

profit ratio from 44% in 2012 to 40% in 2013 due to decrease in gross profit.

48
 The operating profit margin ratio recognize of the percentage of sales to exchange into

all cost and expenses after remaining sales. A high operating profit margin is preferred.

Operating profit margin is calculated as follows: Operating Profit Margin which equals to

Operating profits over Sales times100. In this analysis of BRALIRWA ltd we find out that the

operating profit margin has increased from 21% in 2009 to 32% in 2012 because its operating

profit and sales have increased step by step in those years. This will give the business owners

a lot of important information about the firm's profitability, particularly with regard to cost

control. It shows how much cash is thrown off after most of the expenses are met. This shows

that the company has a good cost control and/or that sales are increasing faster than costs,

which is the optimal situation for BRALIRWA ltd.

4.4. Leverage ratios

Leverage ratios are used to analyze a companys ability to cover its long-term

obligations.

Usually, long-term creditors and stockholders show an interest in a companys ability to

pay its interests when it comes due and to repay face value of debt at maturity. Mainly used

ratios are: Debt to total assets ratio and Debt to equity ratio.

Table 4: Leverage ratios

Source: Researchers calculation based on the financial statements. See appendices.

Debt to total assets ratio measures the percentage of a companys assets that are

financed by debt. It is computed by dividing total liabilities by the total assets. Debt to total

49
assets ratio formula is; Debt to total assets ratio which equals to Total debts over Total assets

times 100. In this problem analysis we see that the percentage of ratio has decreased from

59% in 2009 to58 in 2010 and 60% in 2011 to 59% in 2012 because their asset was increased

at a higher rate. If any company debt ratio decreases day by day it is a good position for the

company and is a positive sign for creditors because the risk of non-payments ability is

lower. According to data we have BRALIRWA ltd had great capacity to borrow in the future,

at no risk.

Debt to total equity is used to compare creditor financing to owner financing. It

demonstrates what proportion of equity and debt the firm is using to finance its assets. This

ratio is calculated as follows: Debt to total equity Ratio which equals to Total liabilities over

Total equity times 100. Compares capital invested by owners/funders (including grants) and

funds provided by lenders. Lenders have priority over equity investors on an enterprises

assets. Lenders want to see that there is some cushion to draw upon in case of financial

difficulty. The more equity there is, the more likely a lender will be repaid. Most lenders

impose limits on the debt equity ratio, commonly 1:1 for business loans. Too much debt can

put your business at risk, but too little debt may limit your potential. Owners want to get

some leverage on their investment to boost profits. This has to be balanced with the ability to

service debt. According to the table 4 above, BRALIRWA ltd has debt to total equity ratio

greater than 1 which indicates that the portion of assets provided by creditors is greater than

the portion of assets provided by stockholders. This means that BRALIRWA ltd uses more

debts in its operations.

4.5Decision made based on ratios analysis

Based on ratios analysis above, the following decisions are made for further improvement of

BRALIRWA ltd:

50
 It is found out that the present liquidity position of BRALIRWA ltd is very much

worse. BRALIRWA ltd should take serious steps to increase the level of working capital, to

increase the current ratio, cash ratio and quick ratio. Current assets should be increased at a

faster rate as compared to current liabilities. BRALIRWA ltd must ensure that it has enough

liquid resources to meet the short term obligations as they fall due. Otherwise, any moment

the present situation may create serious financial troubles for the company which may even

lead BRALIRWA ltd towards bankruptcy.

The company should calculate profitability ratios such as: expenses analysis ratio,

gross margin ratio and net profit ratio for each period covered. It is through this analysis that

a company can be able to assess the expenses incurred comparing to sales realized and gross

margin obtained for a better control of production cost and other expenses.The company

should improve its capacity to attract potential investors by calculating its return to equity

ratio and compare it to the result of this ratio from the firms in same industry to test their

ability to increase the equity even from the external resources that the company can benefit

from potential investors.

BRALIRWA ltd had a change in financial leverages ratio which may not be good and

able to cover its debts and therefore may go bankrupt. These ratios give warnings to the

shareholders and directors of potential financial difficulties. The shareholders and directors

can take actions to prevent the company from going bankrupt. These financial leverage ratios

will help to determine the overall level of financial risk faced by a company and its

shareholders. Generally speaking, the greater the amount of debt of a company the greater the

financial risk is.

The management of the company should look for the means of disclosing company's

financial statement to the professional accountants in order to get advices and

51
recommendations from these experts to get the fully disclosed financial statement on which

financial analysis could be conducted in decision making.

CHAPTER 5: CONCLUSION AND RECOMMENDATION

5.1 Conclusion

The conclusion chapter is directly connected to the purpose. The analysis will be summarized

in order to answer the research questions and fulfill the purpose of the thesis.

The financial ratios are windows into a company's performance and health. Analysis

and interpretation of ratios are an important tool in assessing companys performance. It

reveals the strengths and weaknesses of a firm. It helps the clients to decide in which firm the

risk is less or in which one they should invest so that maximum benefit can be earned. It is

known that investing in any company involves a lot of risk. So before putting up money in

any company one must have thorough knowledge about its past records and performances.

Based on the data available the trend of the company can be predicted in near future.

This thesis mainly focuses on the impact of ratio analysis on performance evaluation

of a company. Often firms make their financial data available to the public to show workers

and investors how well the company is doing. For private firms, statement analysis and

industry comparisons are done for internal use. A few simple ratio calculations can shed light

on how well a company is doing and how it is making profits. Those same ratio calculations

are done by lenders on personal financial data when individuals apply for a mortgage or an

auto loan.

When you are analyzing financial ratios, it is best to reduce amount comparisons to

percentages or ratios so that you have an easy way to judge those comparisons. And if you

compare those ratios results with what you know to be good, fair or bad, you have a way of

52
determining the health of a business. Those ratios could change depending upon the industry

the business is in, the size of the business, the accounting method that is used by the business

and the amount of the credit desired and how healthy the company is.

We already mentioned that the ratio helps to evaluated financial strengths and

weaknesses of BRALIRWA ltd. If it will be prove that why ratios have different pattern and

why ratios marked by negative meaning and why ratios were satisfactory value. We make

thesis about the effect of ratios analysis on business performance. We select BRALIRWA ltd

as one of the business and mentioned that the ratio analysis is the best one tools for

measuring performance evaluation of a business.

We divided the ratio analysis into four categories for performance evaluation such as

liquidity ratio, assets management ratio, profitability ratio and solvency ratio. The liquidity

ratio analysis of the company reflects that BRALIRWA ltd short-term debt paying ability

was not sufficient as well as the ratio shows the companys incapability to meet unexpected

needs of cash in accounting periods 2009-2013. Depending on the liquidity ratio of

BRALIRWA ltd, it was seen that the company would have difficulties with paying its short-

term financial obligations. Moreover, leverage ratios proven that the company would have a

problem with borrowing in the future on account of debts to total assets ratio. It also tended to

remain stable or even increase in the future. The asset management ratio indicated that the

company was not controlled correctly its assets.

The most remarkable result of this analysis was BRALIRWA ltd had no loss during

the accounting periods, and the profit reached highest level in 2012. The profitability ratio

indicated that the company employed its assets in an effective way, and company constantly

53
made profit through its assets and equity in analyzed years 2009-2013.As result of these

factors mentioned above, BRALIRWA ltd was in a good financial position, and the

companys business activities were in a good health in analyzed five years.

5.2 Recommendations

Based on analyzing BRALIRWA ltds liquidity, solvency and profitability, a

prediction has been made that BRALIRWA ltds financial position will continually improve.

From the point of view as a student, BRALIRWA ltd should concentrate on its operating

activities, especially increasing sales in order to generate more profit in the future. The

finding suggests that the BRALIRWA ltd must be responsible to develop their liquidity

position because the liquidity maintains its healthy position otherwise it can face financial

problem.

The company should keep the optimal level of the cash on its accounts. The results of

cash ratio are found under the level of the recommended values. This situation is caused by

small amount of the financial assets, especially on the banks accounts and in cash. The lack

of cash might mean the creditors are not credible. From the side of the owner, they should be

aware of impossibility to pay its short-term liabilities. The company might decrease its short-

term liabilities.

Moreover, asset management condition has to be improved so the company must to

take an attention to improve its assets. Furthermore, the profitability must be developed

otherwise the company loss its earn money. The company should keep the optimal volume of

the inventory. The intensity of usage of inventory should be used more effectively. The

54
company should gain the optimal volume in the view of location of flow production and to

satisfy more needs of customers.

The company should increase its profit before interest and taxation to get a good

return on its shareholders' funds. The company also should generate more profits before

interest and taxation to get good net profit margin ratio. It will be very good if the company

tried to decline the average settlement period for debtors more and more. The company

should use its long-term capital invested in assets more productively in the generation of

revenue.

The company should keep or even increase its liquid current assets to cover its current

liabilities all the time, and that will protect the company from experiencing some liquidity

problems. It can be concluded that BRALIRWA ltd will hereafter keep its strong financial

position and staying profitable, if the suggestions discussed above will be used effectively

and efficiently. Thus, firm manger should concern on inventory and receivables in purpose of

creation of shareholder wealth.

55
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BRALIRWA Annual Report 2009,2010,2011,2012 and 2013.

APPENDICES
A

58
B

59
C

60
D

61
E

62
F

63
64