Financial statement analysis

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FINANCIAL RATIOS AND THE STATE OF HEALTH OF NIGERIAN BANKS

Onyeiwu Charles
University of Lagos, Lagos State, Nigeria Email: chasonyeiwu@yahoo.com
Tel: 2348023206015.

And
Aliemeke Goodluck
Guarranty Trust Bank Plc, Nigeria
Email:goodluck.aliemeke@gtbank.com

Abstract
This study investigates the use of financial ratios to ascertain state of health of Deposit Money Banks in the Nigerian financial services sector using the multivariate analysis propounded by (Altman 1968). Twenty-three banks constitute the sample of which eight, have been indicted as weak, by Central Bank of Nigeria within the year of investigation (CBN 2009).The study applied a Multivariate technique to Nigerian banks to ascertain its ability to discriminate between weak and healthy banks. The audit report for year ended 2009 formed the basis of the calculation. The Z score of each of the banks is found to be below 1.80 indicating ill health. However, it is observed that the banks can be disaggregated into two distinct classes i.e. Those with positive Z score which rightly fall into category of banks that have not been indicted by the Central Bank of Nigeria and those with negative Z score which fall into category of banks which have been indicted by CBN within the past one year resulting in 100 percent correct classification. The study provides the regulatory authorities insight on how the Z score can be used to improve their supervisory oversight function.

Keywards: Financial ratios, Z score, Nigerian banks and financial health

1.1 INTRODUCTION
Financial statement analysis is important to the management, owners, personnel, customers, suppliers, competitors, regulatory agencies, tax payers, lenders, academics and others, each having their views in applying financial statement analysis in their evaluations and making judgments about the financial health of organization. One widely accepted method of assessing financial statements is ratio analysis, which uses data from the balance sheet and income statement to produce values that have easily interpreted financial meaning. All banks, banking systems and other financial organizations routinely evaluate their financial health by calculating various ratios and comparing the values to those for previous periods, looking for differences that could indicate a meaningful change in financial condition. Many financial organizations also compare their own ratio values to those for similar organizations looking for differences that could indicate weaknesses or opportunities for improvement. Financial statements analysis is information processing system designed to provide data for decision making. The information is basically derived from published annual financial statements and accounts of the companies. The financial statements analysis and financial ratios is believed to have originated in the United States. (Horrigan 2001), the first course of financial statement analysis could be traced back to the stages of American’s drive to industrialization in the last half of the Nineteenth century. The major development that created the need for a systematic analysis of companies’ financial data are the emergence of the corporation as the main organizational form of business enterprise, resulting in the separation of management from ownership and the fast increasing role of financial institutions (e.g. Banks, investment and insurance companies) as the major suppliers of capital for business expansion requiring formal evaluation of borrowers credit worthiness, consequently, analyzing corporate financial data. The former is to evaluate operational performance (investment analysis) and the latter to determine solvency...
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