Statement of the problem
Financial analysis seeks to identify a company’s financial strengths, weaknesses and to provide
the essential foundation for decision making and planning (Aimling, 1978). In financial analysis,
a ratio is used as a benchmark for evaluating a company’s past, present and anticipated future
financial performance and condition. The absolute accounting figures reported in financial
statements do not provide meaningful information on the financial performance and financial
condition of a company but only convey meaning when they are related to some other relevant
financial information (Walsh, 1996). Investors value assets based on the earnings that they anticipate
from those investments and they have expectations about the value of their investment
which enables them to make decisions on whether to buy, sell or hold particular assets. The main
objective of investors is to maximize their returns while minimizing risk (Reilly & Brown,
1997). Ordinary shares are a very common form of investment that is used by very many investors
worldwide. Ordinary shares are a popular investment because they offer investors the opportunity
to tailor their investment programs to meet individual needs and preferences. Given the
size and the diversity of the capital markets, it is prudent and reasonable to assume that regardless
the investment objectives of investors, ordinary shares fit the bill. For investors living off
their investment holdings, ordinary shares provide an opportunity of earning a steady stream of
current income from the dividends paid out by companies (Archer & Racette, 1993).
For investors less concerned about current income, ordinary shares serve as a basis for long term
accumulation of wealth. When this strategy is implemented, shares are used like a savings account.
According to Gitman and Joehnk (2002) investors buy shares for the long term as a means