INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Financial statement is a formal record of firm’s financial activities. It

includes income statement, statement of balance sheet, statement of
cash flows and statement of retained earnings. Financial performance
analysis also called financial statement analysis is a process of
reporting what happened to the firms in the past, present and future in
terms of sales, assets, liabilities, earnings, dividends and so forth. This
information is one of the inputs that investors and creditors,
government use for the purpose of tax, general investment that
community use to form expectation about the required returns and
riskiness of the firms (pinches, 1994).

Financial performance is also a process of evaluating and assessing the

relationship between the components of financial statement to obtain
a better understanding of firm’s financial position and financial
operation of the firms. Mangers are frequently evaluates and
compensated on the basis of accounting measures of performance
such as profit margin and return on equity and assets. Investors,
creditors, and bond holders interested in liquidity of the firms (Ross, et,
al, 1998).

Financial performance also involves the assessment of past

performance current performance, and predict about the future using
financial tools of analysis such as ratio analysis horizontal analysis and
vertical analysis. It is the application of analytical tools to the general
purposes of financial statement and related data for making business
decision. It involves the transforming of raw data in to useful
information to the users. Financial analyses also reduce our reliance on
hunches of guesses, intuition and reduce our uncertainty in decision
making by providing an effective and systematic basis for business
decision. The main function of financial analysis is the pinpointing in
the strength and weakness of a business in the past and analyzing of

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figures contained in the financial statement by making comparison of
various complement and examines their content in the form of
percentage birr or dollar.

Since having a good financial performance is a way of knowing the

firms past, present weakness and strength, profitability, debt ratio,
liquidity and asset management and long-term solvency due attention
must be given to it. The factors that mislead the financial performance
like, unskilled man power or personnel that are inadequate knowledge
about the assessment of financial performance leads to many
problems must be identified and studied from time to time in the
process of assessing firm’s financial performance. Unless otherwise the
objectives and goals of the firms is not meet.

Therefore, the aim of this study will be to assess and analyze the
financial performance of Adama Garment Industry (AGI) in general and
to assess the weakness and strength its liquidity (the ability to pay its
short term debt as they come due), solvency (the ability to pay long-
term obligation as they come due) and profitability of the firms using
financial ratios.

1.2 COMPANY BACKGROUND

Adama Garment Industry (AGI) was established in 1987 and managed

under the Ministry of Capacity Building until 2010, when it was
transferred to the Metals and Engineering Corporation (METEC).

Location

AGI is located 105 km East from Addis Ababa, in the town of Adama in
the Oromiya Regional State.  AGI has five factory facilities including:
heavy duty garment factory, garment sewing factory, parachute and
drag chute factory, shoes/gloves factory and furniture cabin factory.

Products/Services Various clothing, canvas and leather products for

military and industrial sector clients including: military uniforms,
factory uniforms, parachutes and drag chutes, car & airplane chairs,

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 combat boots, safety shoes, d/t shoes, raincoats, gloves, back packs,
small bags/pouches, gun slings, d/t tents, special tents (for UN), canvas
and plastic car covers, sleeping bags, weapon holders, embroidery
products like insignia, badge.

Garment and related accessories and canvas products are used by both
military and civilian clients for clothing and shelter purposes.
Embroidery products like insignia and badge are mainly used by
military clients. Car & airplane chairs and different shoes and gloves
are used by both military and civilian clients.

1.3 STATEMENT OF THE PROBLEM

Assessment of financial performance is an analysis of firms past,

present and future financial position and its weakness and strength.
Typically, financial performance of a firm involves the assessment of
firms’ financial statement in the past, present and future. Financial
performance analysis indicates the growth, profitability, debt capacity
and overall liquidity of the firms. A properly analyzed financial
statement provides financial strength and weakness of the firms,
evaluate past performance and set objectives to predict about the
future performance and to assess present financial performance
through proper analysis of tools of analysis (ratio analysis, horizontal
analysis, and vertical analysis) ( www. benleycg. com/: accessed,
1/10/2011).

Many internal users, such as management of the firms interested in

internal control on finance area, better financial condition and better
performance of firms’ present financial condition, evaluation of
opportunities in relation to current position, return on investment

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provided by various assets of the firms. Not only internal users, but
also external users like bond holders interested in the cash flow ability
of the firm, investors, trader creditors interested in the liquidity of the
firms (www. bentleycg .com: Accessed, 1/10/2011).

Always firms should be able to look their performance activities

through assessing of financial statement. However, assessment of
financial performance of a firm is not an easy and one time task to be
done according to the time framed. The tools that are used to assess
financial performance in many organizations especially in the town of
Adama need critical attention to evaluate firms, so that every
organization is able to function and be productive in their due planned
schedule.

1.4 RESEARCH QUESTION

1. How to determine weakness and strength of the firms by using

financial ratio analysis?

2. How to assess liquidity performance of the organization?

3. What are the factors that will affect the profitability performance
of the organization ?

4 How to asses long term solvency of the organization?

1.5 GENERAL OBJECTIVE

The general objective of the study is to assess and analyze the

financial performance of Adama garment industry.

1.5.1 SPECIFIC OBJECTIVES

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  To assess the factory ability to meet its short term debt, this is
called liquidity.

 To assess the profitability of the organization.

 To asses long term solvency of the organization.

 To evaluate asset utilization efficiency of the organization.

1.6 SIGNIFICANCE OF THE STUDY

The study under the title of assessment of financial performance of

Adama Garment industry will has some significance to the researcher,
for the factory and for novice researcher. It will be based on practical
investigation and serves the researcher as a base for further
investigation on the title in the near future.

The study also will show the strength and weakness of the factory’s
liquidity, leverage and asset management of the factory. Therefore,
looking this ratio the factory may know its profitability and liquidity of
the firms, and also riskiness of the firms. For researcher, it will be as a
clue when they need to conduct on the factory’s financial performance.

1.7 SCOPE OF THE STUDY

The study will focus on the assessment of financial performance of

adama Garment Industry. The focal area of the study is to assess
profitability performance with particular focus on five year (from 2009
to 2014)profit trends of Adama Garment Industry . The sources of data
for the study will be limited to the relevant historical financial
statement records of the company(i.e balance sheet, income
statement,statement of cash flow and statement of owner equity).

CHAPTER TWO

2. REVIEW OF RELATED LITERATURE

2.1 AN OVERVIEW OF FINANCIAL PERFORMANCE
Financial performance analysis is the process of evaluating
business projects and other finance related entities to determine

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their suitability for investment. Typically, financial analysis is
used to analyze whether an entity is stable, solvent, liquid, or
profitable enough to be invested in (www. invest podia. com:
Accessed 1/11/2011).

Financial performance of a firm involves the assessment of firms

financial statement in the past, present and predict the future. It
indicates the firms profitability, riskness and overall
liquidity( www. Bentleys. com: Accessed 1/10/2011).

Financial analysis and planning is concerned with transforming

data into a form that can be used to monitor the firm’s financial
condition evaluating the new for increases or reduced productive
capacity and determining what additional or reduced financing is
required. These functions in compass the entire balance sheet as
well as the firms income statements and other financial
statements. Although this activities rely on heavily on accrual
based financial statement, its underlying objectives is to assess
the firms cash flows and develops plans that ensure adequate
cash flow is available to support achievement of its goal
(Gitman, 1998,P.15).

Investment decisions determine both the mix and types of asset

found on the firms balance sheet. This activity is concerned with
the left hand side of the balance sheet. Mix refers to the
numbers of dollars of current and fixed assets. Once the mix is
established the financial manger must determine and attempt to
maintain certain optimal level of each of current assets. The
financial manger must also divided which are the best fixed
assets to acquire and to know when existing fixed assets need to
be modified, replaced, or liquidated. These decision are
important because they affect the firms success in achieving its
goals (Gitman, 1998, P. 15).

Financing decision deals with the right hind side of the firms
balance sheet and involve two major areas. First, the most
appropriate mix of short-term and long term financing must be
established. A second and equally important concern is which

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individual short term or long-term sources of financing are best
at a given point in time. Many of these decisions are defected by
necessity. But, some require an in-depth analysis of the available
of financing alternatives, their costs, and their long run
implications. Against is the effects of these decision on the firms
goal achievement that is most important (Gitman, 1998, P15).

Evaluation of firms performance predict firms future earning and

it is useful both as way to anticipate future condition and more
important as a starting point for planning action that will
influence the future course of events. Financial managers
monitors actual against planned goal and target using the
financial performance evaluation. Evaluation of financial
performance gives clues as to where a firms financial situations
is improving holding constant or deteriorating rating overtime. It
is also helpful to reveal the relative strength and weakness of a
firm as compared to other firm in the same industry (Vanhorn,
1998).

2.2 TYPES OF FINANCIAL STATEMENT

Balance sheet: Refers to the statement of financial position,
reports the assets, liabilities and stockholders equity of a
business enterprise at a specific date. if helps in predicting
amount, timing and uncertainty of future cash flows (Ross, et al,
1998, P. 20).

Income Statements: is a measures of performance over some

period of time, usually a quarter or a year. The business and
investment community issues this report to determine
profitability, Return on equity, and credit worthiness of the firm
(from the research done by Assenafi , 2009).

Statement of Cash Flows: It involves three

components:operating cash flow, capital spending, and change
in net working capital. Operating cash flow refers to the cash
flow that results from the firm’s day to day activities of

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producing and selling capital spending is just money spent on
fixed assets less money received from the sale of fixed assets.
Change in net working capital is an investment in fixed asset
(Ross, et, al, 1998 PP .30-32).

Statements of Owners Equity: As Ashenafi, (2009) Taken

from Meigees. Robert; stock holders equity statements shows,
the difference between the assets and liabilities of a given
companies. It represents the cumulative net contribution by the
stock holders plus earnings that had been retained in the owners
or stock holders interest in a business enterprise as a residual
interest.

2.3 METHOD OF FINANCIAL PERFORMANCE

ANALYSIS
2.3.1 RATIO ANALYSIS
Ratio analysis involves the method of calculating and
interpreting financial ratios to assess the firm’s financial
performance and status. Financial ratio can be divided for
convince in to four basic groups categories: liquidity ratios,
activity ratios, debt ratios, and profitability ratios liquidity is the
firms’ short-term solvency to pay its obligation as they come
due. Liquidity, activity and debt ratio primarily measures risk.
Profitability ratios measure returns. In the near term the
important elements are liquidity, activity and profitability ratio,
because these provide information that is critical to the short run
operation of the firm. If the firm cannot service in the short run,
we need not to be concerned with its long term prospects. Debt
ratios are useful primarily when the analyst is sure that the firms
will successfully whether the short run. As a rule the necessary
inputs to effective financial analysis include at minimum the
income statement and balance sheet (Gitman, 1998, P .12).

One of the most common ways of analyzing financial data is to

calculate ratios from the data to compare against those of other

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companies or against the company’s own historical performance.
For example, return on assets is a common ratio used to
determine how efficient a company is at using its assets and as a
measure of profitability. This ration could be calculated for
several similar companies and compared as part of a large
analyze (www investopeida. com/: Accessed 1/12/20011).

2.3.2 HORIZONTAL ANALYSIS

Horizontal analysis is used to evaluate the trend in the account
over the years. It is a technique for evaluating a series of
financial statement data over a period of time. Horizontal
analysis shown in comparative financial statement and express
financial data from two or more accounting periods in terms of a
single designated base period (Gitman, 1998, P. 110).

2.3.3 VERTICAL ANALYSIS

In vertical analysis all the data in a particular financial statement
are presented as a percentage of a single designated line item in
that statement. For example, we might report income statement
items as percentage of net sales, balance sheet items as a
percentage of to tals assets and items in the statements of cash
flows as a fraction or percentage of the change in cash (Gitman,
1998).

Vertical analysis is also the procedure of preparing and

presenting common size statements. Common size statements is
one that shows the items appearing on it in percentage form as
well as in dollar form. Each item is stated as percentage of some
total of which that is apart. Key financial changes and trends can
be highlighted by the use of common size statements
(www.accounting for management. Com.Accessed 16/11/201

2.3.4 trend analysis

time series or trend analysis of ratios indicates the direction of
changes. This kind of analysis is particular applicable to the item
of profit and loss accounts . It is advisable that trends of sales

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and net income may be studied in the light of known factors. The
rate of fixed expansion or secular trend in the growth of the
business and the general price level. It might be found in
practical that a number of firms would show a persistent growth
over a period of years. But to set a true trend of growth, the
sales figure should be adjusts by suitable index of general price.
Another method of securing trend or growth is one,which can be
used instead the adjusted seal figures or as checking on them is
to tabulate and plot the out put or physical volume of sales
expressed in suitable unit of measure.

2.3.5 benchmarks for evaluation

what is important in ratio analysis in the through understanding
and the important of ratio analysis and values.

To answer such questionable as is it too high or to low? It is good

or bad?.A meaningful standards or basis for comparison is
needed,we will calculate a number of ratios. But what shall we
do with them?How do you interpreter them? How do you decide
whether a company is healthy or sick? There are three
approaches:

compare the ratio of rule of thumb

cross sectional analysis

time series analysis

1 compare the ratio of rule of thumb

has the virtue of simplify but has little to recommend it
conceptually. The appropriate value ratio for company depend
to much on the analysis perspective and on the company
specific circumstance for rules of thumb to be very useful.The
most positive thing to be said in their support is that over the
years,companies conforming to these rules of thumb tend to go
bankrupt some what less frequently than those that do not.

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2 cross sectional analysis
involves the comparison of different firms financial ratio at he
same point in time. The typical business is interested in how well
it has performed in relation to its competitors. Often, the firms
performance will be compared to that of the industry leader, and
the firm may un cover major operating deficiency,if any, which
,if changed, will increase efficiency.Another popular type of
comparison is industry averages.

The comparison of particular ratio to the standards is made ti

isolate any deviations from the norm. Too high or too low values
reflect symptoms of problem. Comparing a company s ratio to
industry ratios provides a useful fell for how the company
measure up to its competitors.

3 Time series analysis

It applied when financial analysis evaluates performance of firm
over time.The firm present or resent ratios are compared with its
own past ratios. Comparison of current to the past performance
allows the firm to determine whither it is progressed planned.
Developing trend can be seen by using multi year
comparison,knowledge of these trends could assist the firm
planning in the future operation,like to discuss in above trend
analysis eliminates and industries differences, enabling the
analysis to draw firms convulsion about the company's financial
health and its variation over time.

2.3.6 Users of Financial Information

The purpose of financial information is to provide inputs for decision making.
Accounting is the information system that identifies records and communicates
the economic events of an organization to interested users. Many people have an
interest in knowing about the on going activities of the business. These people are
users of accounting information. Users of accounting information can be divided
broadly in to two groups. Internal users and external users of the accounting
information (Kieso, et, al, 1998, P. 6)

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 2.3.6.1 Internal Users
Financial statement information has a variety of uses within a firm internal users
like mangers who plan, organize and run a business uses for the evaluation of
firms performance financially. Managers are frequently evaluated and
compensated on the basis of accounting measures of performance such as profit
margin and return on equity. Firms with multiple divisions frequently compare
the performance of those divisions using financial statement information.
Historical financial statement information is very useful for generating
projections about the future and for checking the realism of assumptions made in
those projections.( Ross, et, al, 1998, P. 67-68).

2.3.6.2 External Users

Financial statements information are useful to parties outside the firm, including
short term and long-term creditors and potential investors. Investors use
accounting information to make decisions to buy, hold or sale stock. Creditors
such as suppliers and bankers use accounting information to evaluate the risks
granting credit or lending money (Stephen A Ross et al, 1998, P 68).

CHAPTER THREE
3. METHODOLOGY

3.1.RESEARCH DESIGN

Descriptive survey method will be used and for further analysis of both
qualitative and quantitative types of data will be used. In the case of
quantitative, measurement of data collected in number, percentage
and birr times form will be made for qualitative data (things that

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cannot be expressed in number or quantity) observation will be used
So, almost secondary source of data and quantitative data type will be
used in this study. This will be determined by analysis of different tools
like ration analysis, horizontal analysis and vertical analysis. In this
study the researchers will use research design technique of the survey
of concerning body which is the most fruit full method of formulating
precisely the research problem.

3.2 SAMPLING TECHNIQUE

To conduct this study the researcher ,will be use probability sampling

techniques. In order to identify appropriate characteristics based on
probability sampling (stratified) sampling technique will be applied
from the sample members of 55 emploeey from functional department
of the organization.

3.3 METHOD OF DATA COLLECTION

The researchers will conduct this study and gather primary and
secondary data by the following techniques.

For primary data:

 Interview

 Questionnaires

Under each condition of data gathering technique the researchers will

gather using questions by constrictions close ended question which is
very popular survey research and are easy to process preparing list for
answer. Interviewing will make personally, the researchers will use

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unstructured interview and when gather single questions will use
interview questionnaires (Schedules) and also observation method
which the researchers will observe things around us a scientific tools.
The secondary data will be collected from the company manual,
company expense summery and inspection of cost reports and other.
Most appropriate much like to collect the data which the researchers
need for the research through questioners which little differs and
questioners are being filled in by preparing structured questions to be
responded by the respondents.

CHAPTER FOUR

4. DATA ANALYSIS AND INTERPRETATION

Finally, offer all the necessary data are collected it will be organized
and analyzed through descriptive analysis which transformation of raw
data in to a form that will more than easy to understand and
interpreted by using percentage describing process data technique it

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will be helpful for comparing the trend over time or among categories
using table containing percentage and frequency distribution is easier
to interpret.

4.1 TIME PLAN / BUDGET/

Typ Decem Jan Feb mar April May

e of ber

acti
vity

Pro X
pos
al
pre
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Dat x x
a
coll
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on

Dat x x
a
ana
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Or x x
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izat
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of
the
pap
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Wri x x
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and
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the
pap
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Su x
bmi
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on
and
pre
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4.2 COST PLAN /BUDGET

Materials Unit Quality

Stationary
materials
Packet 1
- Paper
4
- Pen
Other Facilities

- Internet Minute 100

- Photo copy
Paper 100
- Writing and
printing Paper 80
- Telephone
- Transport
Minute 180

Km 5

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Total

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