RIFT VALLEY UNIVERSITY

COLLEGE
BALE ROBE CAMPUS

DEPARTEMENT: BUSINESS ADMINISTRATION

January, 2021
A Review Article on A Tool for Measuring Organization Performance using Ratio Analysis
Research Journal of Finance and Accounting
ISSN 2222-1697 (Paper)
ISSN 2222-2847 (Online) Vol.5, No.19, 2014
Elijah Adeyinka Adedeji
Abstract
Ratio analysis has served as a veritable means of monitoring, measuring and improving performance
in an organization. Hence, the study examines a tool for measuring organization performance using
ratio analysis. Based on the findings of this study, it was recommended that financial ratios should be
computed periodically to reveal areas of strengths and weaknesses, as well as, ratio analysis should be
used to measure performance in terms of profitability.
Keywords: Ratio analysis, Performance, Organization, financial Ratios, Management.
Introduction
The purpose of preparing the financial statements of a company is to convey information on the
overall performance and the state of affairs of such an organisation to all interested parties. More so,
ratio analysis could serve as a practical means of monitoring and improving performance and it could
be enhanced when:
i. Ratios are prepared regularly and on a consistent basis so that trends can be highlighted
and changes investigated.
ii. Ratios prepared for and individual firm can be compared with facilitated when the firm
has ready access to comparative ratios prepared in a standard manner.
iii. Ratios are prepared showing the inter-locking and inter-dependent nature of the factors
which contribute to financial success.
Statement of the Problem
Managerial decision is one of the keys to success in an organization. And as such, management of a
given organization makes decision based on financial performances prevailing in such establishment.
In arriving at such decisions, the management tries to focus their attention on two basics of
comparison which are as follows:
Current performances are compares with the records of the part years in the organization at least five
(5) years period. .
Objective of the Study
The broad objective of the study is to analysis how ratio analysis can be used to measure performance
of an organization. Also, the following specific objectives will be examined in the course of this
study:
 i. To critically analyses the financial statement and evaluate the performance of the
company.
ii. To evaluate the historical activities of the company such that a projection into the future
can be made thereby improving management decision.
iii. To analyze the problems associated with the use of financial ratio analysis and proffer
possible solutions.
Research Questions
The following research questions shall be examined during this study:
i. Do you use financial ratios as a measurement of management performance?
ii. Does ratio analysis help management in taking effective decisions?
iii. Do you agree that financial ratio reveal strengths and weaknesses of an organization?
iv. Does interpretation of ratio yield positive results?
Research Hypotheses
The following hypotheses shall be tested during this research work:
Ho: Financial ratios do not highlight the importance of effective management of an organization.
Hi: Financial ratios highlight the importance of effective management of an organization.
Literature Review
Ratio according to Garbutt (1972) is one number expressed in terms of another. By the use of ratio
analysis techniques, it is possible to facilitate comparison of significant figures, by expressing their
relationship in the form of ratios or percentages, thus enabling the accounts of a business to be
interpreted by bringing into focus salient features contained in the financial statements.
Financial ratios are employed to denote past trends, compare present performances and may give an
indication to future trends, performances or operations of a company and thus acts as signposts for
plans and policies. It could be deduced from the above that ratios serves as practical means of
monitoring and improving performances of a company (Lucey, 1988).
Basis of comparison
Financial ratio as an index is more useful when it is compared with another index. The basis of
comparison includes the following;
i. Intra-Firm comparison or previous year basis.
ii. Inter-Firm comparison or similar business basis.
iii. By basis of ratio established by the management (standard).
Objective of inter-firm comparison Garbutt (1972) stated that inter-firm comparison is intended to
show the management of each firm:
i. How its profitability and productivity compare with that of other firms in the same industry.
ii. In what respects the firm is weaker or stronger than its competitors.
iii. What specific questions of policy or performance should be tackled if the firm’s profitability
and productivity are to be raised?
Classification of financial ratios
Three are various way of classifying ratios; this depends on the information need of the analyst of the
financial statements. Ratio can be classified in terms of their data source; hence, we have the
following classifications:
Balance sheet ratio
These are ratios calculated using two related figures from the balance sheet.
Profit and loss account ratio
These are ratios calculated form related figure in the profit and loss accounts.
Inter statement ratios
An inter statement ratio is calculated by relating items in both the balance sheet and profit and loss
account.
Garbutt (1972) noted that ratios could be loosely grouped into the following and as a measure of
profitability, liquidity or asset use solvency. Another possible and more acceptable method of
classifying ratios is according to the financial activity (functions).
Ratios used to measure the financial activity of a company can be grouped into four in respect of this
research work:
 Profitability and Efficiency.
 Short term solvency and liquidity.
 Long term solvency and liquidity/capital structure.
 Potential and growth investors’ ratio.
Importance ratio analysis
Ratios are effective tool of management in the provision of information and data needed in planning
and determining the efficiency of management for a particular period.
Trend analysis
The importance of trend analysis is that the analyst knows whether the company is operating on a
favorable level or not.
Liquidity position
According ratios enables various user groups to know or determine the ability of a company to meet
its long- or short-term obligation.
Inter-firm comparison
This is important because it enables the management of a company to know the position of the
company in the industry and among competitors.
Profitability
. This helps management to determine whether the company can meet its short- and long-term debts
and still maintain optimum return.
Operating efficiency
This shows how effectively the management utilizes the assets and how the assets are used in
generating sales and revenue.
Advantages of ratio analysis
As stated earlier, there are various techniques which could be employed in the interpretation of the
financial statements. These techniques include the straight forward criticism, ratio analysis and
movement of funds statements (cash flow statements). The ratio analysis technique has the following
advantages over the other techniques.
i. The ratio analysis technique provided a standard through which ratios can be compared at
any point in time.
ii. The ratios are easy to compute since figures used in computing are picked from the financial
statements.
iii. Formulates used in calculating ratios are uniform. That is, the formulas are the same all over.
Methodology
The population of study is the staff of PZ CUSSONS PLC, an organization that is reputable for
efficiency as a result of management integrity. For the purpose of this research work selected
respondents were draw from the total population through simple random sampling. Staffs were
randomly selected from their departments and given the questionnaires. In the process, only a very
few of them collected and filled the questionnaire, while countable number of them allowed to be
interviews.
Research instrument refers to the basic tools of the researcher for measuring, evaluating, analyzing
and exploring of data – Asika (1991). In the course of this research work, data were collected through
the use of well-structured questionnaire designed well in accordance with the objectives of the study.
Finally, the questionnaire was divided into two sections, that is section ‘A’ has the demographic
characteristics of respondents, and section ‘B’ has questions that relates to the study objectives of the
study. the percentages gave an insight into respondents’ perception in respect of the questions and
responses. Hypotheses were tested using analysis of variance and other statistical drawings.
Result and Discussion
The following questions shall be drawn from the questionnaire for the test of hypothesis one (1).
Question One: Do you use financial ratios as a measurement of management performance? Question
Two: Do the management of this company apply financial ratios in making decisions that affect the
company?
Question Four: Do you agree that financial ratio reveal strengths and weaknesses of an organization?
Question Ten: Ratio Analysis is very effective at various aspect of company performance?
Hypothesis One
H0: There is no significant relationship between ratio analysis and organization performance.
Hi: There is a significant relationship between ratio analysis and organization performance.
Test of hypothesis
Data collected from respondents in questions: 1, 2, 4, and 10 shall be subjected to F-distribution
statistical method.
Data Analysis Table

Decision: Fcal is greater than (>) Ftab since Fcal is greater than (>) Ftab, then reject null hypotheses
and accept the alternative.
Therefore, financial ratios highlight the importance of effective management of an organisation.
Conclusion and Recommendations
This research work studied how ratio analysis can be used to measure performance of an
organization. Based on the discussions and findings in the course of this study, the following
conclusions are made:
i. Ratio analysis is a tool of financial analysis, which can be used as a predictive tool for
measuring business performance.
ii. Ratio analysis can be used to show areas of strengths and weaknesses of a company.
iii. Ratio analysis is required for management control decisions, investment decisions and credit
control purposes.
iv. Ratio analysis is required to determine whether a company have been improving or is
deteriorating financially over a period of time.
v. Ratio analysis can be used to determine whether a company have met the required standard
within the industry.
vi. Profitability ratios are useful to the management of a company. They are used to determine
the profitability of a company and the efficiency in the utilization of the resources of a
company.
Therefore, the following recommendations are made:
i. Ratio analysis should form part of management activities and should be computed
periodically to reveal areas of strengths and weaknesses of a company.
ii. Ratios should be used by the management to measure the profitability of the company and
to compare the financial activities of the company with that of other companies within the
same industry. This helps to determine whether the company has performed up to the
standard required by the industry.
iii. The investors should use investment ratios to determine how much divided will accrue to
them.
iv. Creditors and loan providers are advised to check the liquidity of a company before
granting loans or giving any consideration. Therefore, they should consider ratios such as
current ratio and quick assets ratio.
v. The employees of an organization should be interested in ratios such as the long-term
solvency and liquidity ratios. This enables the employees know and measure the security
of their jobs.
References
Asika, N. (1999), Research \Methodology in Behavioural Science, Longman Plc, Lagos
Garbutt, D. (1972), Carter’s Advanced Accounts, Sir ISAAC Pitman and Sons Ltd, London
Lucey, T. (1988), Management Accounting DP Publications Ltd London.
SAS 2 (1987), Nigerian Accounting Standard Board, PAT Publications LTD, Lagos.