CHAPTER ONE 1.0 INTRODUCTION 1.1 BACKGROUND TO THE STUDY
Accounting ratios is primarily designed to meet the information needs of equity investors, bankers, analysts, lawyers, government and creditors. The objective of the ratio analysis includes the comparative measurement of the risk and return facilitating intelligent investment on credit decisions. Accounting ratios generally, can be seen as a process that involves standardization in the use of standardized report methods. Financial statement and other relevant variable allowing for comparison, overtime and cross-sectional between firms to access their performance. Therefore, accounting can be define as firms critical relationship by relating input (cost) with output (benefits) and facilitating comparisons of those relationship overtime, (White Chat, 2014: 2014).
The implication of these accounting ratios is the proportionality assumption that the relationship between numerator and denominator should be similar, irrespective of the size. Ratio cannot be used simply to produce a scaling factor standardization but rather to develop insight into the economic characteristic of different industries and of the different firms in the same industry. Distressed banks, one banks with problem relating to liquidity. Poor earnings on performing assets and liability to pay debts or meets maturing obligations as they become due. Bank classification as distress is based on banking examination rating system with acronym camel.
C Capital Adequacy
A Asset Quality
M Management Competences
E Earnings Strength
L Liquidity Sufficiency
The cognizance of ratio is to give the analysis a very useful assessment of a firm’s financial condition. After gaining political independence in 1960, there was a need for gaining economic independence to enable Nigeria to judge ahead in developing her economy through production, manufacturing and commerce. For these activities to be fully participated in Nigeria there was a need for financial institutions to control and facilitates these services. Although, there were banks operating in Nigeria, they were of foreign based. But there was need for indigenous banks to go round Nigeria and develop her economy by identifying her domestic problem and solving them. The government encouraged and established banks. The government joined in this development with the introduction of Structural Adjustment Programme (SAP) in 1986. UBA Plc has been at the forefront of economic diplomacy, cultivating deep strategic relationship with key international financial institutions who seeks to do business with Nigeria such as, the international finance corporation. Neitherlands FMO, European International Bank and U.S. EXIM.
1.2 STATEMENT OF THE PROBLEM
Accounting research has clearly not proven that financial analysis as a futile exercise on the contrary. It is trying to get better understanding of its modus operandi while the financial market have become increasingly sophisticated in recent years and it is believed that superior financial analysis is still rewarding. Firms, that do not prepare and analyze, their financial statement and up having problems, little knowledge of what is happening in the firm, poor accountability, poor records, to determine the earning power of the firm, is it financially strong or weak? Most management do not use financial ratio to compare the present and the previous year to forecast the future performance and that, is why we are having distress in the financial institutions. Recent financial history clearly provides many examples of companies where at least in retrospect the financial market ignored warning signal consequently suffered significant financial losses. Management needs a proper analysis to judge ahead, inability to understanding the impact of alternative accounting method, places the investors at competitive disadvantages in the world of increasing sophisticated analysis techniques.
1.3 OBJECTIVES OF THE STUDY
The main objectives of this study are to evaluate financial ratio techniques of analyzing the financial reports of banks and to ascertain their performance.
Specific objectives include:
To evaluate accounting ratio in predicting and analyzing financial report of banks (UBA bank in particular).
The research intends to use accounting ratio as a qualitative tool in analyzing financial reports.
To use accounting ratio to predict bankruptcy.
To demonstrate the use of accounting ratio on the expansion of a sound banking industry and,
To highlight the paramount importance of ratio analysis in forecasting banking trends.
1.4 RESEARCH HYPOTHESIS
H1:Accounting ratio is an effective instrument for comparison in predicting bank distress.
H0:Accounting ratio is not an effective instrument for comparison in predicting bank distress.
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