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

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 financialstrategy. Hence, proper care and attention need to be given while such decision is taken. The purpose of thisstudy is to examine the relationship between the financial ratio analysis and profitability of the NigerianPharmaceutical industry over the past eleven (11) years period from 2001 – 2011. These financial ratio analysehave immense potentials to help organizations in improving their revenue generation ability as well asminimization 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 Grossprofit margin (GPM). Profitability as a dependent variable is represented by Gross profit margin (GPM) whilefinancial ratio analysis stands as ITR, DTR, CRSV and TATR for independent variables. Secondary data wereobtained from the financial statements (Balance sheet and Profit and Loss account) of the selected quotedpharmaceutical companies’ financial statement. The data have been analyzed using descriptive research methodand multiple regressions to find out the relationship between the variables. The results of the analysis showedthat there is a negative relationship between all independent variables with profitability in the Nigerianpharmaceutical industry. It also revealed that debtors’ turnover ratio, creditors’ velocity and total assets turnoverratio have no significant relationship on the profitability of the company while only inventory turnover ratioshows a significant relationship with profitability. The results further suggested that only 17.8% of theindependent variables are determinant factors of profitability in the enterprises sampled while 82.2% of themajor 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 morefrequently by management to prevent out of stock syndrome or over stocking of their products. It is alsorecommended that creditors’ velocity should be at a point where the creditors and purchases are equal in order totake the advantage of credit facility and any discount associated with prompt payment for goods to increase theprofitability of the company. The management should utilize its assets efficient in generating more income forthe company.