Financial Ratio Analysis as a Determinant of Profitability in Nigerian Pharmaceutical Industry

Enekwe Chinedu Innocent, Okwo Ifeoma Mary, Ordu Monday Matthew

Abstract


Financial ratio analysis is a vital one since the profitability of an enterprise is directly affected by such decision.
The successful selection and use of appropriate financial ratio is one of the key elements of the firm’s financial
strategy. Hence, proper care and attention need to be given while such decision is taken. The purpose of this
study is to examine the relationship between the financial ratio analysis and profitability of the Nigerian
Pharmaceutical industry over the past eleven (11) years period from 2001 – 2011. These financial ratio analyse
have immense potentials to help organizations in improving their revenue generation ability as well as
minimization of costs. The researcher used five (5) variables for the analyses such as: Inventory turnover ratio
(ITR); Debtors’ turnover ratio (DTR); Creditors’ velocity (CRSV); Total assets turnover ratio (TATR) and Gross
profit margin (GPM). Profitability as a dependent variable is represented by Gross profit margin (GPM) while
financial ratio analysis stands as ITR, DTR, CRSV and TATR for independent variables. Secondary data were
obtained from the financial statements (Balance sheet and Profit and Loss account) of the selected quoted
pharmaceutical companies’ financial statement. The data have been analyzed using descriptive research method
and multiple regressions to find out the relationship between the variables. The results of the analysis showed
that there is a negative relationship between all independent variables with profitability in the Nigerian
pharmaceutical industry. It also revealed that debtors’ turnover ratio, creditors’ velocity and total assets turnover
ratio have no significant relationship on the profitability of the company while only inventory turnover ratio
shows a significant relationship with profitability. The results further suggested that only 17.8% of the
independent variables are determinant factors of profitability in the enterprises sampled while 82.2% of the
major factors are determine from other factors outside the independent variables. Based on the above premises,
the researcher recommended that the inventories of the company should be checked and monitored more
frequently by management to prevent out of stock syndrome or over stocking of their products. It is also
recommended that creditors’ velocity should be at a point where the creditors and purchases are equal in order to
take the advantage of credit facility and any discount associated with prompt payment for goods to increase the
profitability of the company. The management should utilize its assets efficient in generating more income for
the company.


Full Text: PDF DOI: 10.5539/ijbm.v8n8p107

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International Journal of Business and Management   ISSN 1833-3850 (Print)   ISSN 1833-8119 (Online)

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