Dagi
Dagi
Dagi
DETERGENT S.C
ADVISOR: BAHIRU W.
UNITY UNIVERSITY
MAY, 2023
The word performance is derived from the word ‘parfourmen’, which means to do, to carry out
or to render. It refers the act of performing, execution, accomplishment, fulfilment etc. In
broader sense, performance refers to the accomplishment of a given task measured against preset
standards of accuracy, completeness, cost and speed. In other words, it refers to the degree to
which an achievement is being or has been accomplished. Performance is used to indicate firm’s
success, conditions and compliance.
It is the process of measuring the results of a firm’s policies and operations in monitory terms. It
is used to measure firm’s overall financial health over a given period of time. It can also be used
to compare similar firms across the same industry or to compare industries or sectors in
aggregation.
The financial performance analysis identifies the financial strengths and weaknesses of the firm
by properly establishing relationships between the items of the balance sheet and the income
statement. In short financial performance analysis is the process of selection, relation and
evaluation.
Generally, financial statements capture and report on four key business activities planning,
financing, investing, and operating activities. Knowing what information is to be found plus
where to find it and how to use it in financial statement is imperative to intelligently
understanding, analyzing, and interpreting financial data. Financial statement analysis is useful
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as a tool in selecting investment or merger candidates, as a forecasting tool or future financial
conditions, as an evaluation tool for managerial and other business decisions (Pamela P, 2010).
To sum up, analysis of financial statements provides the essential concepts and tools needed by
security analysts who make decisions on the basis of information found in financial statements
(Pamela P, 2010).
REPI SOAP & DETERGENT S.CO formerly known as REPI Soap Factory was established
1974. Less than a year after its formation, it was nationalized by the Ethiopian government &
was managed under the direct supervision of the National Chemical Corporation and was re-
established as a public enterprise in 1992 by the council of Ministers.
At that time, the company’s main vision was to compete against local & imported powder
detergent products through its famous brand “ROL”, due to the machinery age and technological
issues there was an issue of wastage which nearly bankrupted the company but thanks to a
pioneering idea of creating detergent bar (cake) in 1979, Repi gave birth to a new line of product
and a new brand “Ajax”. Again in 1994 production of a liquid detergent was introduced under
the brand name ‘LARGO”
Following the earmarking of REPI Soap factory by the government for joint venture partnership,
LINA PLC undertook a series of studies on the factory with the aim of concluding a joint venture
agreement with the government. The joint venture arrangement lasted one year followed by a full
takeover of the share company LINA PLC after settling of the remaining 49% share previously
held by the Ethiopian government.
Financial analysis (also referred to as financial statement analysis or accounting analysis) refers
to an assessment of the visibility, stability and profitability of a business, sub –business or
project. It is performed by professionals who prepare reports using ratios that make use of
information taken from financial statements and other reports. Those reports are usually
presented to top management as one of their bases in making business decisions such as continue
or discontinue its main operation or part of its business, make or purchase certain materials in the
manufacture of its product, Acquire or rent/ lease certain machineries and equipment in the
2
production of its goods, make decisions regarding investing or lending capital and other
decisions that allow management to make an informed selection on various alternatives in the
conduct of its business.
Generally, when we will be assessing different researches worked on Repi Soap and Detergent
PLC. There is no enough research that shows the real financial performance of the company. As
a result, the researcher will be assessing the exact financial performance of the company by using
different accounting techniques. In addition to assessing the financial performance of the
company the researcher finds out any problem related to the financial performance of the
company such as insufficient profit, cash shortage, loan repayment and shortage of inventory etc.
Thus in order to know the exact performance of the company related to finance the following
three questions will be carefully answered: -
1) Does The firm be able to earn income and sustain growth in both short term and long
term? (Profitability).
2) What extent the firm able to pay its obligation to creditors and other third parties in the
long term? (Insolvency).
3) Does the firm be able to maintain in positive cash flow, while satisfying immediate
obligations? (Liquidity).
In line with the broad objective highlighted above the following specific objective will be
formulated.
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1.5 Significance of the study
The study under the title assessment of financial performance of Repi soap and Detergent S.C try
to show the current position of the company, identify the company current strength and
weakness, and help the management to take corrective actions for the problem faced relating to
the profitability, the solvency and the liquidity. In general, the researcher quietly sure that the
manager of the company used as guide line in overcoming the problem that face related to the
financial performance of the company. The last but not least, this study also helps for other
researchers who conduct their research on the same title.
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CHAPTER TWO: LITERATURE REVIEW
The Balance Sheet shows the financial position (condition) of the firm at a given point of time. It
provides a snapshot and may be regarded as a static picture. “Balance sheet is a summary of a
firm’s financial position on a given date that shows Total assets = Total liabilities + Owner’s
equity.”
The income statement (referred as the profit and loss statement) reflects the performance of the
firm over a period of time. “Income statement is a summary of a firm’s revenues and expenses
over a specified period, ending with net income or loss for the period.” However, financial
statements do not reveal all the information related to the financial operations of a firm, but they
5
furnish some extremely useful information, which highlights two important factors profitability
and financial Soundness. Thus analysis of financial statements is an important aid to financial
performance analysis.
The analysis of financial statements is a process of evaluating the performance analysis includes
analysis and interpretation of financial statements in such a way that it undertakes full diagnosis
of the profitability and financial soundness of the business. Relationship between component
parts of financial statements to obtain a better understanding of the firm’s position and
performance.
The financial performance analysis identifies the financial strengths and weaknesses of the firm
by properly establishing relationships between the items of the balance sheet and profit and loss
account. The first task is to select the information relevant to the decision under to consideration
from the total information contained in the financial statements. The second is arranging the
information in a way to highlight significant relationships. The final is interpretation and drawing
of inferences and conclusions. (Pamela P, 2010)
In short, financial performance analysis is the process of selection, relation, and evaluation.
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Management: interested in internal control, better financial condition and better performance
(appraisal of firm’s present financial condition, evaluation of opportunities in relation to this
current position, return on investment provided by various assets of the company, etc)(Pamela
P,2010)
2.5 Types of financial performance analysis:
Financial performance analysis can be classified into different categories:-
1. External analysis
This analysis is undertaken by the outsiders of the business namely investors, credit agencies,
government agencies, and other creditors who have no access to the internal records of the
company. They mainly use published financial statements for the analysis and as it serves limited
purposes.
2. Internal analysis
This analysis is undertaken by the persons namely executives and employees of the organization
or by the officers appointed by government or court who have access to the books of account and
other information related to the business.
3. Horizontal Analysis
In this type of analysis financial statements for a number of years are reviewed and analyzed.
The current year’s figures are compared with the standard or base year and changes are shown
usually in the form of percentage. This analysis helps the management to have an insight into
levels and areas of strength and weaknesses. This analysis is also called Dynamic Analysis as it
based on data from various years.
4. Vertical Analysis
In this type of Analysis study is made of quantitative relationship of the various items of
financial statements on a particular date. This analysis is useful in comparing the performance of
several companies in the same group, or divisions or departments in the same company. This
analysis is not much helpful in proper analysis of firm’s financial Analysis as it based on position
because it depends on the data for one period. This analysis is also called Static data from one
date or for one accounting period.
2.6 Techniques/tools of financial performance analysis:
An analysis of financial performance can be possible through the use of one or more tools/
techniques of financial analysis. One of the most common techniques is accounting techniques. It
7
is also known as financial techniques. Various accounting techniques such as Comparative
Financial Analysis, Common-size Financial Analysis, Trend Analysis and Ratio Analysis may be
used for the purpose of financial Analysis.(Modern corporate finance, 1994)
2.6.1 Ratio Analysis
In order to evaluate financial condition and performance of a firm, the financial analyst needs
certain tools to be applied on various financial aspects. One of the widely used and powerful
tools is ratio or index. Ratios express the numerical relationship between two or more things.
This relationship can be expressed as percentages (25% of revenue), fraction (one-forth of
revenue), or proportion of numbers (1:4). Accounting ratios are used to describe significant
relationships, which exist between figures shown on a balance sheet, in a profit and loss account,
in a budgetary control system or in any other part of the accounting organization. Ratio analysis
plays an important role in determining the financial strengths and weaknesses of a company
relative to that of other companies in the same industry. The analysis also reveals whether the
company's financial position has been improving or deteriorating over time. Ratios can be
classified into four broad groups on the basis of items used: (1) Liquidity Ratio, (ii) Capital
Structure/Leverage Ratios, (iii) Profitability Ratios, and (iv) Activity Ratios. (Pamela P, 2010).
2.6.1.1 Liquidity Ratios
Liquidity ratios provide information about a firm’s ability to meet its short-term financial
obligations. These ratios are calculated to comment up on the short-term paying capacity of a
concern or the firm’s ability to meet its current obligations. Two frequently used liquidity ratios
are the current ratio (or working capital ratio) and the quick ratio cash ratio is the most
conservative liquidity ratio.
A. Current Ratio
Current ratio may be defined as the relationship between current assets and current liabilities.
This ratio is also known as ‘working capital ratio’. It is a measure of general liquidity and is most
widely used to make the analysis for short term financial position or liquidity of a firm. It is
calculated by dividing the total of the current assets by total of the current liabilities.
Current Assets
Formula: Current Ratio =
Current Liabilities
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A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its
current obligations in time and when they become due. On the other hand, a relatively low
current ratio represents that the liquidity position of the firm is not good and the firm shall not be
able to pay its current liabilities in time without facing difficulties. An increase in the current
ratio represents improvement in the liquidity position of the firm while a decrease in the current
ratio represents that there has been deterioration in the liquidity position of the firm. A ratio
equal to or near 2:1 is considered as a standard or normal or satisfactory. The idea of having
doubled the current assets as compared to current liabilities is to provide for the delays and losses
in the realization of current assets. However, the rule of 2:1 should not be blindly used while
making interpretation of the ratios. Firms having less than 2:1 ratio may be having a better
liquidity than even firms having more than 2:1 ratio. This is because of the reason that current
ratio measures the quantity of the current assets and not the quality of the current assets.
It is an instrument to measure the liquidity position of the company. This ratio is the same as the
current ratio except that not include inventory account and prepaid expenses. The two
components of quick ratio are liquid assets and liquid liabilities. Liquid asset include all current
asset except inventory and prepaid expenses. Inventories can’t be termed as liquid assets because
it can’t be converted in to cash immediately without a loss of value. In the same manner, prepaid
expenses are also excluded from the list of liquid assets because they are not expected to be
converted in to cash similarly, liquid liabilities means current liabilities.
Liquid Assets
Formula: Quick Ratio =
Current Liabilities
C. Cash Ratio
The cash ratio is the most conservative liquidity ratio. It excludes all current assets except the
most liquid cash and cash equivalents.
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2.6.1.2 Financial Leverage Ratio (insolvency)
Long term solvency or leverage ratios convey a firm’s ability to meet the interest costs and
payment schedules of its long term obligations.
It is a significant measure of solvency since a high degree of debt in the capital structure may
make it difficult for the company to meet interest charges and principal payment of a maturity.
This ratio reflects the relative claims of creditors and share holders against the asset of the
company.
Total debt
Formula: Debt to Equity =
Total Equity
B. Debt Ratio
The debt ratio compares total liabilities from total asset. It shows the percentage of total funds
obtained from creditors. Creditors would rather see low debt ratio because there is a great
cushion for creditor’s losses if the firm goes bankrupt. It tells the amount of other people’s
money being used in attempting to generate profits. A high ratio indicates more of firms asset are
provided by creditors relative to owner.
Total debt
Formula: Debt Ratio =
Total Asset
This ratio serves as one measure of firm’s ability to meet its interest payment and thus avoid
bankruptcy. In geranial the high the ratio, the great the probability that the company could cover
its interest payment without difficulty. It also shows light on the firm’s capacity to take on new
debt.
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EBIT
Formula: Time Interest earned =
Interest Expense
Gross profit ratio is the ratio of gross profit to net sates expressed as a percentage. It expresses
the relationship between gross profit and sales.
Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as percentage.
ROEC is the relationship between profits of accompany and its equity. It is the bottom line
measure for shareholders, measuring the profits earned for each birr invested in the firm’s stock.
¿
Formula: - Return on Equity ¿ Shareholder equity
It is the ratio of net income to share holder’s investment. It is the relationship between net
income and share holder’s. This ratio establishes the profitability from the share hobbler’s point
of view. The ratio is generally calculated in percentage.
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2.6.1.4 Asset Turnover Ratio (Activity Ratio)
Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They sometimes are
referred to so efficiency ratios, asset utilization rations, or asset management ratios. Two
commonly used asset turnover ratios are receivables turnover and inventory turnover.
A. Receivables Turnover
Receivables turnover is an indication of how quickly the firm collects its account receivables. In
simple words it indicates the number of times average debtors (receivable) are turned over during
a year.
Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet
the requirements of the business. But the level of inventory should neither be too high nor too
low. A too high inventory means higher carrying costs and higher risk of stocks becoming
obsolete whereas too low inventory may mean the loss of business opportunities. It is very
essential to keep sufficient stock in business inventory turnover ratio indicates the number of
time the stock has been turned over during the period and evaluates the efficiency with which a
firm is able to manage its inventory. This ratio indicates whether investment in stock is within
proper limit or not.
COGS NS
Formula:- Inventory Turnover Ratio ¿ =
inventory inventory
Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio measures the
efficiency and profit earning capacity of the concern. Higher the ratio, greater is the intensive
utilization of fixed assets. Lower ratio means under utilization of fixed assets.
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sales
Formula: - FAT =
NFA
Ratio analysis is an important and age-old technique of financial analysis. The following are
some of the advantages / Benefits of ratio analysis:
The ratios analysis is one of the most powerful tools of financial management. Though ratios are
simple to calculate and easy to understand, they suffer from serious limitations.
1. Limitations of financial statements: Ratios are based only on the information which has
been recorded in the financial statements. Financial statements themselves are subject to
several limitations. Thus ratios derived, there from, are also subject to those limitations.
For example, non-financial changes though important for the business are not relevant by
the financial statements. Financial statements are affected to a very great extent by
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accounting conventions and concepts. Personal judgment plays a great part in
determining the figures for financial statements.
2. Comparative study required: Ratios are useful in judging the efficiency of the business
only when they are compared with past results of the business. However, such a
comparison only provide glimpse of the past performance and forecasts for future may
not prove correct since several other factors like market conditions, management policies,
etc. may affect the future operations.
3. Ratios alone are not adequate: Ratios are only indicators; they cannot be taken as final
regarding good or bad financial position of the business. Other things have also to be
seen.
4. Problems of price level changes: A change in price level can affect the validity of ratios
calculated for different time periods. In such a case the ratio analysis may not clearly
indicate the trend in solvency and profitability of the company. The financial statements,
therefore, be adjusted keeping in view the price level changes if a meaningful comparison
is to be made through accounting ratios.
5. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are
no well accepted standards or rule of thumb for all ratios which can be accepted as norm.
It renders interpretation of the ratios difficult.
6. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To
make a better interpretation, a number of ratios have to be calculated which is likely to
confuse the analyst than help him in making any good decision.
7. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios
have to interpret and different people may interpret the same ratio in different way.
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2.6.3 Trend Analysis
Trend analysis indicates changes in an item or a group of items over a period of time and helps to
drown the conclusion regarding the changes in data. In this technique, a base year is chosen and
the amount of item for that year is taken as one hundred for that year. On the basis of that the
index numbers for other years are calculated. It shows the direction in which concern is going.
2.7 Advantages of Financial Statement Analysis:
There are various advantages of financial statements analysis. The major benefit is that the
investors get enough idea to decide about the investments of their funds in the specific company.
Secondly, regulatory authorities like International Accounting Standards Board can ensure
whether the company is following accounting standards or not. Thirdly, financial statements
analysis can help the government agencies to analyze the taxation due to the company.
Moreover, company can analyze its own performance over the period of time through financial
statements analysis.
Although financial statement analysis is highly useful tool, it has two limitations. These two
limitations involve the comparability of financial data between companies and the need to look
beyond ratios.
Comparison of one company with another can provide valuable clues about the financial health
of an organization. Unfortunately, differences in accounting methods between companies
sometimes make it difficult to compare the companies' financial data. For example if one firm
values its inventories by LIFO method and another firm by the average cost method, then direct
comparison of financial data such as inventory valuations and cost of goods sold between the
two firms may be misleading. Sometimes enough data are presented in foot notes to the financial
statements to restate data to a comparable basis. Otherwise, the analyst should keep in mind the
lack of comparability of the data before drawing any definite conclusion. Nevertheless, even
with this limitation in mind, comparisons of key ratios with other companies and with industry
average often suggest avenues for further investigation.
15
B) The Need to Look Beyond Ratios:
An inexperienced analyst may assume that ratios are sufficient in themselves as a basis for
judgment about the future. Nothing could be further from the truth. Conclusions based on ratios
analysis must be regarded as tentative. Ratios should not be viewed as an end, but rather they
should be viewed as starting point, as indicators of what to pursue in greater depth. They raise
many questions, but they rarely answer any question by themselves.
In addition to ratios, other sources of data should be analyzed in order to make judgment about
the future of an organization. The analyst should look, for example, at industry trends,
technological changes, changes in consumer tastes, changes in broad economic factors, and
changes within the firm itself.
In the meantime, the government of Ethiopia liberalized the economy since 1991 and the
government has designed and adopted agricultural development led industrialization strategy to
enhance economic growth. However, the country’s industrial development strategy, value adding
private sector is considered the engine of the sectors’ growth. Accordingly, currently in Ethiopia
light manufacturing industries, such as leather, textile, metal and cement are considered as
strategic sub-sectors for the socio-economic development of the country. This is because the
nature and ability of the industries to absorb a significant labor force, contribute to export
earnings and tendency to facilitate multiple linkage with the rural population in line with the
country’s industrial development strategy is paramount. In addition, the country endowment with
rich source of raw material makes the sectors very important in competing in the international
market. Even though Ethiopia is a land of huge natural resources, but we have improperly used
16
these resources for the development. Industries were not properly used local resources for as an
input on their manufacturing processes. As a result, they depend on imported materials rather
than local resources. Consequently, of these the manufacturing sector is still infancy and have
full of problems. Also, even if, the tremendous efforts made and the economic growth achieved,
the Ethiopian economy remains beleaguered by structural problems. In specific, study showsthat,
due to skill man power
Although financial statement analysis is highly useful tool, it has two limitations. These two
limitations involve the comparability of financial data between companies and the need to look
beyond ratios.
Comparison of one company with another can provide valuable clues about the financial health
of an organization. Unfortunately, differences in accounting methods between companies
sometimes make it difficult to compare the companies' financial data. For example, if one firm
values its inventories by LIFO method and another firm by the average cost method, then direct
comparison of financial data such as inventory valuations and cost of goods sold between the
two firms may be misleading. Sometimes enough data are presented in foot notes to the financial
statements to restate data to a comparable basis. Otherwise, the analyst should keep in mind the
lack of comparability of the data before drawing any definite conclusion. Nevertheless, even
with this limitation in mind, comparisons of key ratios with other companies and with industry
average often suggest avenues for further investigation.
An inexperienced analyst may assume that ratios are sufficient in themselves as a basis for
judgment about the future. Nothing could be further from the truth. Conclusions based on ratios
analysis must be regarded as tentative. Ratios should not be viewed as an end, but rather they
should be viewed as starting point, as indicators of what to pursue in greater depth. They raise
many questions, but they rarely answer any question by themselves.
17
In addition to ratios, other sources of data should be analyzed in order to make judgment about
the future of an organization. The analyst should look, for example, at industry trends,
technological changes, changes in consumer tastes, changes in broad economic factors, and
changes within the firm itself.
18
literature from various books, journals, newspapers, reports of the Repi soap and detergent S.C
and various websites, would also have used as a source of secondary data. Secondary data would
be collect through personal review of the above listed sources and types of data.
Furthermore, in order to support the secondary data for clarification would be required
finance department of the company was communicate through questionnaire. Judgmental
sampling would have used to select the interviewees. This judgmental sampling would have
taken based on who provide the best information for the purpose of this study
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CHAPTER FOUR: TIME AND BUDGET SCHEDULE
1 Topic selection
2 Preparation of proposal
3 Collection of useful material
4 Data collection
5 Data analysis and writing of
final research
6 Submission of research
7 Presentation of final research
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4.2. Budget schedule
Item Quantit Per Total
y unit(birr) Cost(birr)
Equipment and Paper 400 1200 1200
stationary
Pen 12 180 180
Pencil 12 100 100
Binder 1 80 80
8 GB Flash 1 350 350
Miscellaneous 500
Total Cost 2410
Transportation 1000
Personal Cost Internet 5 1000
Contingency 500
21
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Asres Abite and Dejene Mamo (2012). Evaluation of Financial Performance of Banking
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(The Young Economists Journal), 1, 82-102.
Survey and Directions for Future Research. European Journal of Operational Research,
98, 175-212.
Casu, B., Molyneux, P., and Girardone, C. (2006). Introduction to Banking, London, England:
Prentice Hall.
Hempel, G., Simonson, D., and Coleman, A. (1994). Bank Management: Text and Cases (4th
Edition). New York, USA: John Wiley & Sons, Inc.
Joh,. N. Meyer (2008). Accounting For Non Accountants. New York, USA: Penguin Group
Incorporated.
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Kieso, E., Weygandt, J. and Warfield, D. (2012). Intermediate Accounting (14th edition). New
York, USA: John Wiley Inc.
Mabwe, Kumbirai and Robert, Webb (2010). Financial Ratio Analysis of Commercial Bank in
South Africa. African Review of Economics and Finance, 2, 1.
Peter, S. Rose. (2002). Commercial Bank Management (5th Edition). New Delhi, India: Mc Graw
Hill Limited.
Seiford, L., and Zhu, J. (1999). Profitability and Marketability of the Top 55 U.S. Commercial
Banks. Management Science, 45 (9), 1270-1288.
Munir, S., Muhammad, R., Rao, Q., Muhammad, A., and Ali, R. (2008). Financial Performance
Assessment of Banks. A Case of Pakistani Public Sector Banks. International Journal of
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Sinkey, J. (2002). Commercial Bank Financial Management: In the Financial Services Industry
(6th ed). Singapore, Indonesia: Prentice Hall.
Terefe, Simeneh (2013). Prospect and Challenges of Private Commercial Banks in Ethiopia.
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APPENDIX
UNITY UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING & FINANCE
The following questionnaire is designed by a researcher to collect data from the employees of
Repi soap and detergent S.C.The purpose of this questionnaire is to gather relevant information
regarding financial performance of Repi soap and detergent S.C; the researcher will use this data
for academic purpose only. Follow the following instructions to answer.
1. Gender
Female
Male
2. Marital Status
Single Separated Divorced
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Married widowed
3. Age
Below 22 22-30
4. Educational level
Diploma Degree
Masters Others
5. Religion affection
Orthodox Protestant
Muslims Others
No
2. If your answer for questions number one above is yes, what are your explanations?
………………………………………………………………………………………………
………………………………………………………………………………………………
…………………………
3. Is the company trying show change on its liquidity, leverage and market relationship through
the year?
Yes
No
5. If your response is yes, please tried to justify it how changed through the year?
………………………………………………………………………………………………
………………………………………………………………………………………………
…………………………
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6. Does the company face a problem in its financial performance
Yes
No
7. If your answer for number six is yes, please list the problem that faced in the company
financial performance.
…………………………………………………………………………………………………
…………………………………………………………………………………………………
……………………………
8. Does the company show future prospect, based on its past performance?
Yes
No
9. If your answer is yes for question number eight above, please list future prospect of the
company based on its past performance.
………………………………………………………………………………………………
………………………………………………………………………………………………
10. If your answer for number nine is no, what are the reasons to show the future performance
based on its past performance?
………………………………………………………………………………………………
………………………………………………………………………………………………
…………………………
11. Do you think there is relationship among liquidity, leverage and activity ratio in the
performance of the company?
Yes
No
12. If your answer is yes for question number 11, what kind of relationships is existing between
those ratios?
Positive
Negative
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13. If your answer is positive, write positive relationships of these relations
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………
14. If your answer is negative, write the negative relationship exists these relations
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
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