# RATIO ANALYSIS AS A TOOL FOR PERFORMANCE EVALUATION CASE STUDY OF GLAXOSMITHKLINE

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CHAPTER ONE

INTRODUCTION

1.0 INTRODUCTION

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.

1.1 BACKGROUND TO THE STUDY

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 diicult 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. a. To evaluate ratio analysis as a tool for measuring the performance of manufacturing industries. b. To help users of financial statement know the extent to which ratio analysis evaluates performance in an organization c. 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. d. 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. e. And lastly, to open another angle to ratio analysis an which future researchers can explore and hence, further an area not covered by the present research work.