The Business and financial performance of a company – the topic is an imperative exercise, in which end users of financial statement must embark on in order to effectively gratify the need of those statements. One of the tools of analyzing financial situation is the application of ratio analysis side by side with other information significant to the company’s immediate sector (market conditions) and the economic environment in which the company operates. Many business stakeholders have rather commented and are long demanding for corporate business organizations’ financial report in a way that would help make better decisions on investment, lending or continuing supplier’s relationship that would ensure early settlement by the firm. Whereas potential employees want his or her productive age spent in a secured and career driven environment. Reasons for choosing the topic
In an ever changing business world where globalization is imperative, there is the need for users of financial statement to understand the dynamics of what is responsible for an organisation’s success or failure. Most users believe that when a business is profitable and shows strong financial ratios, then that organisation is successful, but in contrast other factors also determine the true success of an organisation, which include but not limited to an organisation understanding its external environment and internal capabilities, identifying and assessing attractive opportunities. As an accounting student, it has mostly been emphasized that financial performance analysis is a tool that answers most questions relating to the financial success or otherwise of an organisation. Business performance on the other hand looks at all other non-financial indicators that indicate an organization is able to use all resources available to it efficiently. Brief history of Nigeria carton and packaging company
The organization is one of the longest surviving manufacturing firms in Nigeria. The organization has been in existence for over three decades. The company is a private organization and is not quoted on the Nigerian Stock exchange. The principal activity of NICAPACO is to manufacture corrugated cartons and paper packaging products. The Vision of the Company is ‘To remain true to our name by manufacturing high quality products possible’. (Nigeria carton and packaging company Nig. Ltd., 2009-2011)
Aims and objectives of the report
This research although serving the academic purpose of completing the degree requirement of the Oxford Brookes University is also intended to give an insight into the business and financial performance of Nigeria Carton and Packaging Company. Main aims and objectives include:
•Critically examine the concepts of business and financial performance from a simplistic and technical point of view. •To use financial analytical tools such as ratios to support and reach conclusions on the subject matter (NICAPACO) as to profitability and efficiency, liquidity, leverage and investors assurance; and to compare these with that of its competitor, Multipak Nigeria Ltd. •To analyse the strengths, weaknesses, opportunities and threats and their impact on the company. •To present conclusions on the analysis carried out to aid a potential investor to make well informed decision regarding investment in Nigeria carton and packaging company. •Relate as far as the academic research findings could permit, the case study to ascertain the extent to which theory agrees with practice.
In other to properly analyse NICAPACO, both qualitative and quantitative factors would be considered. The qualitative factor tends to evaluate the overall business activities of NICAPACO and its strategic plans over a period of three years (2009- 2011). In other to achieve this, an applicable business model would be used to analyse the company. The quantitative factors tend to analyse the overall performance of company using key performance ratios. The statement of financial position as well as the income statement would be analysed. Finally, the study would be logically summarized with the conclusions and recommendations made.
INFORMATION GATHERING AND ACCOUNTING/BUSINESS TECHNIQUES
Sources used and reasons for their use
Only the secondary source of information gathering was used as I had limitations to assess any primary source.
The secondary source used was the most dependable. The audited financial statements of Nigeria Carton and Packaging Company for the years ended 31st December 2009, 2010 and 2011. Other secondary sources includes textbooks, related research work on analysis of financial situation; IT based sources which include the internet, journals, newspapers as well as similar research works on business and financial performance.
Description of methods used to gather information
Enquiry and Observation
The audited full annual accounts and reports of Nigeria Carton and Packaging Company were obtained for 2009, 2010 and 2011 used as case study
Textbooks on financial accounting, financial management and business analysis served as good pool of knowledge for this purpose. E-books and other web materials. The Internet served as an unrestricted library and made it feasible for me to have universal information on this research.
Limitations of information gathering methods and ethical issues This study covered a period of three years (2009-2011); data in annual reports are historical and out of date as of today, but can still be used for financial analyses of this write up that would impact on the conclusions reached in the research. Gathering the relevant information relating to key industry average ratios for the period under review was very difficult because NICAPACO is not listed on the Nigeria Stock Exchange.
The major ethical challenges faced during the information gathering centered on plagiarisms and confidentiality of crucial information i.e. it took time for the management of NICAPACO to approve the use of their financial report for the research work. The management of NICAPACO also concluded that it would not be in its best position to disclose information about the strengths/weakness of the Company. This act led to a major deadlock in my initial plans.
Accounting techniques used
The accounting techniques used in this report are;
•Financial Ratio Analysis
Financial ratio analysis
A ratio in itself is a mathematical relation between one quantity and another. A financial ratio compares a bit of financial information and another in a financial statement. Financial ratio analysis is an accounting technique that evaluates the strength and weakness of an organisation and also determines a company’s financial position. There are four major groups of financial ratios:
1.Profitability and Efficiency ratios
4.Investors assurance ratios
Profitability and Efficiency
The primary goal of any organisation (profit-making) is to make profit. Profit is so essential to an organization if it needs to survive in an ever changing business environment. Profit in general means the excess of revenue/income over expenses. Profitability ratios are concerned with effectiveness at generating profit. (Atrill & McLaney, 2011) Efficiency on the other hand relates to how well an organization uses its available resources to generate profit. According to (Atrill & McLaney, 2011) in the book Financial accounting for decision makers, efficiency ratios may be used to measure the efficiency with which particular resources have been used within the business.
These ratios are also referred to as activity ratios. For the purpose of analysing the financial situation of NICAPACO, common profitability and efficiency ratios that would be computed include; return on ordinary shareholders’ funds (ROSF), return on capital employed (ROCE), operating profit margin, and gross profit margin, average inventories turnover period, the average settlement period for trade receivables, the average settlement period for trade payables and sales revenue to capital employed.
Liquidity ratios are concerned with the ability of the business to meet its short-term financial obligations. (Atrill & McLaney, 2011). For the purpose of analysing the financial situation of NICAPACO, common ratios that would be computed include; current ratio and acid test ratio (also known as Quick ratio).
This is quite an interesting ratio, because most organizations one way or the other, borrow funds that are aimed at towards investments with the aim of obtaining a high return. Debt financing is very common in today’s business, because the extent to which a firm uses debt financing, or financial leverage, has three important implications: (1) by raising funds through debt, shareholders can maintain control of a firm without increasing their investment.
(2) If the firm earns more on investments financed with borrowed funds than it pays in interest, then its shareholders’ returns are magnified, or “leveraged,” but their risks are also magnified. (3) Creditors look to the equity, or owner-supplied funds, to provide a margin of safety, so the higher the proportion of funding supplied by shareholders, the less risk creditors face. (Ehrhardt & Brigham, 2011). Some of the ratios that can be used to determine how high or low financial leverage includes; debt Ratio (Total debt to Total assets) and debt to equity ratio.
Investors’ assurance ratios
Investors are people who are not involved in the day to day management of the organization, but who invest their resources or are yet to invest their resources. They must be able to measure whether their investments in the organisation would yield good returns or not. But for the purpose of this analysis, the category of these investors is restricted to the company’s shareholders. The ratios to be computed include: earning per share ratio and the dividend per share ratio.
Trend analysis is the process of comparing business data over time to identify any consistent results or trends. Trend analysis helps you understand how your business has performed and predict where current business operations and practices will take you. Done well, it will give you ideas about how you might change things to move your business in the right direction. (Queensland Government, 2012). It is a useful tool in form of charts (graphs) for visually examining financial ratios of company overtime.
Business techniques used
The business techniques used in this report are SWOT analysis and PESTEL analysis. SWOT Analysis SWOT analysis is a business tool which scans the strategic environment in which an organisation operates in. The organisation’s environment is divided into the internal and external. The internal environment of the organisation can be classified as strength or weakness, while the external environment can be classified as opportunities or threats. (Kaplan Financial, 2011). SWOT can help management in a business discover: •What the business does better than the competition
•What competitors do better than the business
•Whether the business is making the most of the opportunities available
•How a business should respond to changes in its external environment (Tutor2u, n.d.)
Source:(Http://creately.com/blog/diagrams/swot-analysis-vs-pest-analysis/, 2012) PESTEL Analysis
To achieve competitive advantage, a manager needs to understand that there are external factors that are outside the control of an organization or even a manager. As the saying goes “the only thing constant in life is change”. The external environment is quite volatile and constantly changing; an organisation operating in such environment should know and understand this as these factors would affect the decisions made by managers.
The PESTEL analysis looks at the macro environment using the following headings; Political, Economic, Social, Technological, Environmental and Legal. (Kaplan Financial, 2011) SWOT analysis looks more into an organisation, but PESTEL analysis concentrates on the external environment in which the organisation operates in, therefore it is very appropriate to use PESTEL analysis to generate ideas for SWOT analysis.
Limitations of the study
Limitations of financial ratios and trend analysis
Although ratio analysis can be a very useful technique, it is important to realize its limitations; 1.Firms can employ “window dressing” techniques to make their financial statements look stronger. To illustrate, suppose a company takes out a 2-year loan in late December, because the loan is for more than one year, it is not included in current liabilities even though the cash received through the loan is reported as a current asset. This improves the current and quick ratios and makes the year-end balance sheet look stronger. If the company pays the loan back in January, then the transaction was strictly window dressing. (Ehrhardt & Brigham, 2011, p109).
2.It can be difficult to find a suitable benchmark (for example, another business) to compare with. (Atrill & McLaney, 2011, p286) 3.Some ratios could mislead due to the ‘snapshot’ nature of the statement of financial position. (Atrill & McLaney, 2011, p286)
Limitations of SWOT and PESTEL analysis
The following are likely limitations of PESTEL analysis;
1.The disadvantage of the PESTEL analysis is that it requires numerous people to be involved in the study. Knowledge from different domains is needed for the results to be accurate. Also, different people have the tendency to view a scenario differently; the PESTEL analysis needs varied perspectives and points of view. (Http://www.ehow.com/info_8468735_disadvantages-using-pestle-analysis.html, n.d.) 2.The results of the PESTEL analysis are likely to be influenced by the opinions and personal judgment of the person carrying out the evaluation. The results are highly subjective, and the interpretations vary from individual to individual.
(Http://www.ehow.com/info_8468735_disadvantages-using-pestle-analysis.html, n.d.) The following are also possible limitations of SWOT analysis; 1.In order for a SWOT analysis to be truly successful, it should extend beyond a simple list of strengths, weaknesses, opportunities and threats. For example, a business should consider what degrees of strengths and weaknesses it possesses in comparison to competitors in order to determine how strong those strengths actually are. (Http://www.ehow.com/list_6157124_advantages-disadvantages-swot-analysis.html, n.d.)
2.SWOT analysis in itself is a simple four point list. The disadvantage to the simplicity of this type of analysis is that it usually creates a very simple list that is not presented critically. If a company is focused only on the creation of a list, then it may not be focusing its attention sufficiently or deeply enough on how it can actually achieve all of its objectives. (Http://www.ehow.com/list_6157124_advantages-disadvantages-swot-analysis.html, n.d.)
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