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RATIO ANALYSIS AS A TOOL FOR PERFORMANCE EVALUATION (CASE STUDY OF GLAXOSMITHKLINE)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Ratio has been most important tools for the effective development of manufacturing companies and industries, the major uses of ratio is to access the profitability, gearing, liquidity and asset turnover of the company. The introduction of ratio analysis in manufacturing company has brought about a turn around in many industry and companies. The important of ratio analysis in the running of any manufacturing cannot be over emphasizes, it is this significant role that led to the believe. That ratio is the life blood of every manufacturing companies and industries.
The primary objectives of a company being in existence is to make profit. Although this is not only objective. It nevertheless remains an extremely important yardstick used in determining the long run survival of most companies. Therefore it is necessary to be also to access whether or not a company has performed well over a period of time. This and loss account, but compared with the amount of money invested in the business? Are they equivalent to the level earned by major competitors? We need to know whether or not the company is in a healthy short term financial position for long-term expansion. We need to know the answer to these and many other questions. However, it is difficult to access how well a firm or company is doing by merely examining the Naira amount reported for individual items in the financial statement. Financial statements, in their raw forms hold little or no meaning to the user. The figures contained there is have to be converted to ratios in order to ensure easy analysis, ratios are not the end but a means to an end. They ensures analyst ask the right question (Adeyeye and fajembola 1998 page 21).
According to Ajayi (1998 page 42), financial analysis is the process of identifying the financial strength and weaknesses of a firm by property establishing relationships between items of the balance sheet and the profit and loss account. Olowe (1997 pg 239) says financial ration analysis is the relationship between financial data in the financial statement to aid the financial condition and performance of a firm. The analysis will give an analyst a better insight into the understanding of the financial statements that would be obtained by examining the financial data alone.
Ratio analysis is a powerful tool for financial analysis a ratio is defined by Pandey (1999 pg 109) as the indicated quotient to two mathematical expressions and also as “the relationship between two or more things. Because of its flexibility, financial ratio can be used to analyse all forms of business ownership irrespective of their sizes and figures; the analysis can be carried into all aspects of the operations of manufacturing industries. In view of thus this research work examined ratio analysis as an effective tools for performance evaluation in a manufacturing industry.
1.2 STATEMENT OF THE PROBLEM
The financial state and the results of operations of business enterprises are of interest to various groups including the management, shareholders, creditors, the government, employees, customers, financial analysts and advisers, potential shareholders, competitors etc. The principal statements together with supplementary statement present much of basic information needed to make sound economic decisions regarding the business enterprise. Most of the items in the financial statement when considered individually, do not give any serious meaning so there is the need of finding an effective tool of evaluating the performance of the company’s operations. Hence, the adoption of ratio analysis as a tool for performance evaluation and the research is conducted on the Glaxosmithkline consumer Plc to ascertain whether truly or not analysis is an effective tool for evaluating the performance of manufacturing industries.
1.3 OBJECTIVE OF THE STUDY
The main objective of carrying out this study is to evaluate the financial statement and performance of Glaxosmithkline consumer Plc for the last five years so as to reveal it financial strength and weaknesses and the causes, which have contributed thereto. The specific objectives are to appraise the company’s capital structure and its leverage.
1. To evaluate ratio analysis as a tool for measuring the performance of manufacturing industries.
2. To help users of financial statement know the extent to which ratio analysis evaluates performance in an organization
3. To analysis the company solvency, in relating to current assets and current liabilities and the breakdown of these measures to show the effect of cash flow, inventory change and movements in debtors and creditors.
4. To assess the company in terms of value to investors ratios dealing with this area includes PE (Price/earnings) ratio dividend yield and other such investment criteria.
5. To open another angle to ratio analysis which future researchers can explore and hence, further an area not covered by the present research work.
1.4 RESEARCH HYPOTHESIS
Ho: Ratio analysis are not significant in performance evaluation.
HI: Ratio analysis are significant in performance evaluation.
1.5 SIGNIFICANCE OF THE STUDY
In this present time when companies are going bankrupt and getting liquidated, this research work would provide a substantial information to manufacturing industries on how ratio analysis helps in measuring and evaluating their performance which the study is also justified in the following ways, it would enlighten the researcher’s audience on the usage of financial ratio in assessing a company’s performance. It is equally expected that prospective investors with little or no accounting knowledge would be able to critically evaluate the financial statement of organizations, which are of interest to them when carrying out investment decisions. Finally, future researchers in similar field would find this research work useful, as it could be a reference for their study.
1.6 SCOPE OF THE STUDY
The study is basically on the impact of ratio analysis as a tool for evaluating the performance of manufacturing industries. It covers the examination of ratio analysis as a useful tool for measuring the performance of Glaxersmithkline consumer Plc and the study also, covers the examination of its annual report and account for a period of five (5) successive financial years (2004-2008).
1.7 HISTORICAL BACKGROUND OF THE CASE STUDY
Glaxosmithkline consumer Nigeria Plc was incorporated in 1971 in the United Kingdom with the shares of the company held 46.4 percent and 53.6% by Nigerian shareholders. Glaxosmithkline is formed through the merger of Glaxo welcome and Smithkline Beecham (GSK). In 2001 Glaxosmithkline moves to its new U.K. headquarters in Brentford, west London, (NSK Hore consists of an internal fully glazed street; the building was designed with input from employees, Glaxosmithkline re-organizes its research and development effort into centres of excellence for drugs development (CEDDs) small business unit that emphasize flexibility, innovation and therapeutic focus Glaxosmithkline launches the African malaria partnership to help combat a disease that kills more than one (1) million people every year.
In 2002 Glaxosmithkline makes the 19th anniversary of AET, the first medicine used to treat Hiv/Aids. By the end of 2002, Glaxosmithkline had secured 120 arrangement to supply preferentially priced Hiv/Aids medicines to 50 of the world’s poorest countries. In 2003 and 2004, ten (10) million people in sri laika receives free doses of Glaxosmithkline donated albendaole to help prevent the transmission of lymphatic filariasis. Glaxosmithkline also launches its clinical trail register, an internet site contemning clinical trail data that anyone can access Glaxosmithkline is the first pharmaceutical company to offer this level of transparency for its clinical trial data. In 2006 Glaxosmithkline produce over 10 million packs of anti-flu treatment Relenza in one year to boost its consumer health care portfolio, Glaxosmithkline acquire CNS in producers of the breathe Right nasal dilator strips and fiber chance dietary fiber supplements by the end of 2006, 600 million treatment for lymphatic filariasisi had been donated as part of the company commitment to eradicate award for effort to end lymphatic filariasis.
In 2007 and 2008, it was a busy year for acquisition, Glaxosmithkline acquires domaritis, a leader in developing anticbody therapies, paresis pharmaceuticals a biopharmaceuticals coming and reliant pharmaceuticals, a producer of cardiovascular medicines. Glaxosmithkline submission of combination vaccine Glaxorix to the European medicines Agency (EMEA) with the intention of providing the vaccine to Africa with no commercial reward. Andrewe witty named CEO designate to replace IP Gariner in may 2008. In 2009, weight loss medicine all launches in Europe. As influenza A (H1N1) spreads across the world. Glaxosmithkline commits to tackling the pandemic with its anti-retroviral and vaccine products. Glaxosmithkline and Pfizer viiv healthcare, a new company focused on deliverying advances in treatment and care for Hiv communities. it also agrees to lauch locozade in China. Glaxosmithkline HiNi pandemrik vaccine receives European commission approval, as panel of its commitment to greater transparency, Glaxosmithkline publish speaking and consulting fees paid to U.S Physicians.
And finally in 2010 Glaxosmithkline contribute $1.4 million of medicines to support victims of the Haiti Earthquake, Glaxosmithkline announces open innovation strategy to help deliver new and better medicines for people living in the world’s poorest countries new collaborations will share intellectual property for neglected tropical diseases such as malaria, Glaxosmithkline joins global vaccine alliance to help prevent millions of children from contracting pneumacoccal disease in the world’s poorest countries. The company is engaged in the manufacturing, marketing and distribution of a wide range of health care brands, well established in Nigeria. these include the consumer healthcare brands such as panadol, Andrew liver salts, macleans, Aquafresh, Phensic, lucozade, Ribena and a range of internationally acclaimed pharmaceutically, including Amoxil and Augmentin (antibiotics) zental (the anthemintic), Halfan (Antifmalaria) and vaccines etc.
1.8 DEFINITION OF KEY TERMS
RATIO ANALYSIS: Ratio analysis, simply put the analysis of accounting ratios. An accounting ratio to Igben (1999), is a proportional or friction or percentage expressing the relationship between one item in asset of financial statements. Ratio analysis involves the use of ratios as a benchmark for evaluating the financial position and performance of a firm (Pandey, 1999).
PERFORMANCE EVALUATION: Performance can be defined as the ability of a person of machine to do something well (Longman Dictionary of contemporary English 2nd Edition, 1987). Performance evaluation, therefore involve efforts or activities aimed at assessing the ability of a company to manage investors funds well, so that an optimum return can be earned on the capital invested in them.
ANALYST: It is an executive whose mental orientation is driven by facts analysis and logic (Koch, 1991, page 150).
ANALYTICAL TOOLS: It is an instrument for making rational decision toward achieving the objectives of the firm (Olowe 1997 pg 239).
FINANCIAL STATEMENT: These include a large volume of quantitative data supplemented by descriptive notes. (Ekwere, 1997 page 191).
DATA: A much abused plural noun (incorrectly used by most managers as though, it were singular) indicating the objective numerical and factual basis of analysis and conclusions (Koch, 1994, page 15).
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