The Relationship between Financial Ratio Analysis and Corporate Profitability: A Study of Selected Quoted Oil and Gas Companies in Nigeria (Published)
The title of this work is the relationship between financial ratio analysis and corporate profitability: a study of selected quoted oil and gas companies in Nigeria. The issue of deciding on an effective financial ratio analysis for corporate profitability has been a major problem of most oil and gas companies in Nigeria. The successful selection and use of appropriate planning tool is one of the key elements of a firm’s financial strategy. Therefore, proper care and attention need to be given while such decision is taken. Thus, financial ratio analysis relationship has been discovered as having immense potentials to help organization in improving their revenue generation ability as well as minimization of costs. The purpose of this study is to examine the relationship between financial ratio analysis and corporate profitability of Nigeria oil and gas industry over a period of five (5) years (2008-2012). This work employed five (5) financial ratio analysis such as total assets turnover ratio (TATR), debt equity ratio (DER), debtor’s turnover ratio (DTR), interest coverage (IC) and creditors’ turnover ratio (CTR) in determining their relationship and effect on corporate profitability (Return on assets) of oil and gas companies in Nigeria. The ex-post facts research design was used in this study. Corporate profitability as a dependent variable is represented by return on assets (ROA) while financial ratio analysis stand as TATR, DTR, DER, IC and CTR for independent variables. The data were obtained from the financial account and annual reports (both statement of comprehensive income and statement of financial position) of the selected quoted oil and gas companies on the Nigeria stock exchange (NSE). Descriptive statistics, Pearson correlation and regressions were employed to find out the relationship between the variables and their effect on corporate profitability. The results of the analysis shows that total assets turnover ratio (TATR), debtor’s turnover ratio (DTR) and interest coverage (IC) have positive relationship and statistically significant with corporate profitability while debt equity ratio (DER) and creditor’s turnover ratio (CTR) have negative relationship and statistically insignificant with corporate profitability in the Nigeria oil and gas industry. The analysis also revealed that the debtor’s turnover ratio (DTR) has positive relationship and statistically significant with total assets turnover ratio (TATR) and IC have effect on corporate profitability while DTR, DER and CTR have no effect on corporate profitability in quoted oil and gas companies in Nigeria. The results further suggested that only 46.9% of the variations on the dependent variable were caused by the independent variables in our model suggesting that 53.1% of the variations in corporate profitability were caused by other factors outside our model. Based on the other findings, the researcher recommends that the management should not make use of debt finance in the performance of their growth. The study also recommend that creditor’s and purchases must be equal in order to take the advantage of credit facility and any discount associated with prompt payment for products to increase the corporate profitability. Management should utilize its assets efficiently in order to generate more income for the company.