CHAPTER ONE

GENERAL INTRODUCTION

1.0 Introduction

The primary objectives of every business are profitability and solvency.  Profitability is the ability of a business to make profit, while solvency is the ability of a business to pay debts as they fall due (Hermanson et al, 1992: 824).  However, the achievement of these objectives requires efficient management of resources of the business through planning, budgeting, forecasting, control, and decision – making.  Also, the strength and weakness of the business need to be identified and necessary corrective measures applied.  Interestingly, financial statements provide information that facilitates these functions.

Basically, financial statement analysis communicates financial and economic information needed for decision –making.  Thus, the American Accounting Association in (Okezie, 2002) defined financial information (accounting information) as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the information”. According to Wikipedia, a financial statement (or financial report) is a formal record of the financial activities of a business, person or other entity.

Although profits are often used as the basis for judging the performance of a business, such profits must be related to the various items of the financial statements in order to be meaningful and useful for decision making. Furthermore, owing to the technicalities involved in the procession, interpretation and publication of financial information in a summarized nature in financial statements, a lot of truths are hidden in them. Thus, they need to be analyzed and interpreted by means of financial ratios to enable the users understand the meaning of the absolute amounts shown in them, and make informed business decisions.

In this regard, financial statements carry lots of financial Information that are hidden in the figures. The figures in financial statements become more useful when they are related to each other or to some other relevant financial data. Therefore, users of financial information go a further step to establish relationships (or ratios) among selected data in financial statements. This was observed by Essien (2006:144)

 “Financial (accounting) ratio is a proportion or fraction or percentage expressing the relationship between one item in a set financial statements and another item in the financial statements. Financial ratios are the most powerful of all tools used in analyzing and interpreting financial statements” (According to Igben (1999:423). Therefore, ratio analysis involves taking statics of number (or items) out of financial statements and forming ratios with them, to enhance informed judgments and decisions (Lasher, 1997). Remarkably, one of the effective ways of providing information needed for decision-making is ratio analysis. Business decisions of make or buy, investment or divestment, expansion or contraction, capital-organization and reconstruction, and so on cannot be properly made without the aid of financial ratios. They give cue to the financial strengths and weaknesses of a business, and highlight aspects of a business requiring further investigation.

Therefore, this research will be carried out to show how financial statement analysis help users such managers, shareholders, investors, creditors, and other stakeholders make informed judgments and decisions about the past performance, present operations, and futures potential of the business.

1.1 Background of the study

Financial analysis plays a crucial role in investment decision-making both for individuals and organizations. Corporate organizations owe a duty to fully disclose matters concerning their operations so as to aid investors in making investment decisions.

Financial statement provides important information for a wide variety of decision. According to AMEDU and MERCY [2012], both large and small organizations in addition to satisfying the legislating requirement tend to retain existing investors and attract potential ones through the publication of their financial statements where the capital stock of a corporation is widely held and its affairs are of interest to general public relations.

Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and stability. It is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment. Les Sociétés Anonymes des Brasseries du Cameroon (SABC) is a prominent brewery company operating in Cameroon. As a public limited company (société anonyme), SABC is subject to various legal and regulatory requirements related to financial reporting and disclosure. Financial statement analysis plays a crucial role in assessing the financial health and performance of companies like SABC. It involves examining and interpreting financial statements to gain insights into a company’s profitability, liquidity, solvency, and overall financial position.

The decision-making process within SABC, as in any other organization, relies heavily on accurate and meaningful financial information. Financial statement analysis provides decision-makers within SABC with valuable information to evaluate the company’s past performance, assess its current financial condition, and make informed decisions for the future. Such decisions may include investment strategies, resource allocation, pricing decisions, expansion plans, and financial risk management.

The effects of financial statement analysis on decision-making can be far-reaching. By analyzing financial statements, decision-makers can identify trends, patterns, and key financial ratios that help them understand the company’s financial strengths and weaknesses. They can also evaluate the company’s ability to generate profits, manage its debts, and meet its financial obligations.

Furthermore, financial statement analysis enables decision-makers to compare the performance of SABC against industry benchmarks and competitors. This comparison allows them to assess the company’s market position, competitiveness, and potential areas for improvement. It provides insights into whether SABC’s financial performance is above or below industry standards and helps guide strategic decision-making accordingly.

Moreover, financial statement analysis assists decision-makers in assessing the financial implications of potential investment projects or strategic initiatives. By analyzing the financial statements, decision-makers can evaluate the expected returns, risks, and feasibility of different projects or initiatives. This analysis aids in determining the allocation of financial resources and helps prioritize investments that align with the company’s strategic goals.

However, it is important to note that financial statement analysis has its limitations. Financial statements provide historical information and may not capture all relevant aspects of a company’s operations or future prospects. Decision-makers need to consider other factors, such as market conditions, industry trends, regulatory changes, and qualitative aspects of the business.

Given the significance of financial statement analysis in the decision-making process, this study aims to explore and analyze the effects of financial statement analysis on the decision-making process within Les Sociétés Anonymes des Brasseries du Cameroon (SABC). By examining the relationship between financial statement analysis and decision-making, this study seeks to provide insights into how financial information influences strategic and operational decisions within the organization. The findings of this study can contribute to a better understanding of the role of financial statement analysis in enhancing decision-making effectiveness and improving overall financial performance.

1,2 Statement of the Problem

As a current situation in the society of Cameroon, investment decisions in SABC have been very slow due to the negligence in the use of financial statements and other important financial records. Most organization are still ignorant of the benefits of financial statements, thereby limiting their knowledge about their financial position and above all their ability to use financial ratio analysis to make important investment decisions.

For this reason, it is very important for the researcher to carry out a proper study and research on this issue, to point out the alarming signal on the effect of the financial statement in investment decisions in SABC. Incidentally, bookkeeping as a practice is a necessary pointer of strength and weakness in a business management expertise and financial reporting skills necessary for sound decision making has been way below the conventional standard expected.

Financial statements hold the potential of unraveling the future of SABC as an integral driver of economic growth and development I low income economies. Despite the use of financial statement in SABC DOUALA, the organization is still unaware of the importance in the frequency and manner of presentation of these statements as far as investments are concerned. Having in mind the fact that financial viability is quite important, what therefore is the effect of financial statements in the investment decision making of SABC Douala?

  1.3 Research Questions

The above listed problems give rise to research questions which will be answered in the course of this study. According to Uzoagulu [1998], research questions guide the researcher in constructing the questionnaires.  The study will therefore be based to provide answers to the following questions:

1.3.1 Main Research Question

What are the effects of financial statement analysis on decision making on SABC Company?

1.3.2 Specific Research Question

1. What are the problems associated to financial statement analysis?
2. What is the importance of financial statement analysis to its users?
3. What is the effect of ratio analysis on the decision making of SABC?
4. To what extent do decision-makers within SABC utilize financial statement analysis in their decision-making processes?
5. What types of financial statement analysis techniques are commonly employed by SABC decision-makers?

1.4 Objectives of the Study

1.4.1 Main research objective

The main objective of this thesis is to empirically examine the effect of financial statement analysis on decision making of manufacturing industries with case study being Les Sociétés Anonymes des Brasseries du Cameroun (SABC).

1.4.2 The specific objectives include to:

1. Identification of the problems associated to financial statements and ratio analysis
2. Examination of the importance of financial statement analysis to its users.
3. Examination of the effect of ratio analysis on decision making of SABC