TITLE

CAVITE NATIONAL HIGH SCHOOL – SENIOR HIGH SCHOOL

Chief E. Martin St., Caridad, Cavite City

THE EFFECT OF FINANCIAL RATIO ANALYSIS TO THE PEOPLE

OF CAVITE CITY IN SMALL BUSINESS APPRAISAL

A Concept Paper
Presented to the Faculty of
Cavite National High School - Senior High School
Cavite City

In fulfillment of the requirements

for Practical Research I
Qualitative Research Study

Members:
Sarabia, Josh Andrei C.
Oliva, Michaella D.J
Nava, Oakley Rain R.
Vanta, Carl daniel, D
Macaraeg, John Rainel
Loyola, Meiwa Jane
Cinco, Keisha Gab Knowell M.

ABM 11-A
STEM 11-E

2022-2023

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TABLE OF CONTENTS

Page .

Title Page i

Table of Contents ii

INTRODUCTION iv

Background of the Study v

Objectives of the Study vi

Statement of the Problem vi

Scope and Delimitation of the Study vii

Limitations of the Study vii

Significance of the Study viii

Definition of Terms ix

LITERATURE REVIEW x

Local Literature x

Foreign Literature xii

Local Studies xv

Foreign Studies xvi

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METHODOLOGY xxi

Research Design xxi

Population and Sampling xxii

Research Instrument/s xxiii

Data Collection Techniques xxv

Data Gathering Procedure xxv

Ethical Considerations xxvi

REFERENCES xxviii

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CHAPTER 1

THE PROBLEM AND ITS SETTING

Introduction

The financial ratios analysis can positively impact the process of evaluating small

businesses in Cavite. This can lead to improved decision-making, better assessment of risks, and

enhanced communication among stakeholders. Financial ratio analysis can help small business

owners and lenders identify areas of strength and weakness in their financial performance, such

as liquidity, profitability, efficiency, solvency, and potential for growth. Through the use of

financial ratios, entrepreneurs can compare their business to industry standards, set goals, and

track progress over time. Lenders can also utilize financial ratios to assess the creditworthiness

of borrowers, estimate repayment capacity, and negotiate loan terms. However, the effectiveness

of financial ratio analysis depends on various factors, such as the accuracy and quality of

financial data, the relevance of the ratios to the industry and context, the skill and experience of

analysts, and the ability of users to interpret and apply the results.

The financial ratio analysis could be advantage for small businesses in Cavite.

However, there are difficulties and restrictions that need to be considered. A major

challenges is the limited financial knowledge and awareness of small business proprietors,

which could lead to mistakes or incomplete financial statements, misunderstandings of ratios,

and inaccurate decision-making. Another challenge is the potential biases or personal

perspective of financial analysts who might use different formulas, ways, or ideas based on

their own preferences. To overcome these challenges, it is necessary to establish more

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financial education and training programs for small business owners and to introduce more

standardize and efficiency methods for conducting financial ratio analysis.

Background of the Study

The financial ratio analysis is a tool that is used by investors, lenders, and other

stakeholders to evaluate the financial health and performance of a company. Financial ratio

analysis is a commonly used method of financial analysis that gives businesses important

information that can be used to make informed decisions about a company’s financial position

and future prospects. This research aims to thoroughly define financial ratio analysis and to

explore and examine its effects and benefits to the small businesses locally and internationally.

Financial ratio analysis is a quantitative method of assessing the financial health of

businesses by analyzing their financial statements. Financial ratios are calculated by comparing

different financial data points, such as revenues, expenses, assets, and liabilities. These ratios can

provide information on a range of financial aspects, including liquidity, profitability, debt

management, and asset utilization. By analyzing these ratios, businesses can gain a better

understanding of their financial performance, which can be used to make informed decisions

about investments, loans, and other financial transactions, identify areas of strength and

weakness, and make informed decisions about financial management. Financial ratio analysis is

widely used by businesses of all sizes, from small startups to large corporations, to monitor and

improve their financial health.

Small businesses contribute a lot to the Philippine economy. They help with building the

regions economic growth by providing thousands of people employment opportunities and

generating income for the country. And since 99.6% of the country’s registered business

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enterprises are apart of MSME (micro, small and medium enterprises), it is essential to prioritize

the growth and sustainability of these enterprises. However, small businesses face many

challenges, including Cash flow management: Small businesses often struggle with cash flow

management, which can lead to a range of issues such as difficulty paying bills and employee

salaries, Issues with Profitability: Small businesses may struggle with profitability due to various

factors such as low sales volume or high expenses, Inventory management: Small businesses

may struggle with inventory management, which can lead to issues such as excess inventory or

stock shortages. And many more. But, by applying financial ratio analysis in your business, all of

these problems could either be fixed or simply avoided before it could even happen. These are

the reasons why financial ratio analysis is important to not only small businesses but for

businesses in general.

Financial Ratio Analysis can offer a business several benefits, Here are some:

1. Assists businesses in evaluating their financial performance: Financial ratio analysis can

help businesses assess and analyze their financial performance and standings. It provides insights

into the financial health of the company and helps them discover the strengths and weaknesses of

the business

2. Helps businesses identify areas for improvement: Financial ratio analysis aids businesses

in identifying areas for improvement in their financial performance. It provides insights into the

financial health of the business, Allowing businesses to identify areas for improvement.

3. Helps in benchmarking: Financial ratio analysis helps small business owners to

benchmark their financial performance against industry standards. This helps them to determine

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where they stand in comparison to their Competitors and identify areas where they need to

improve.

4. Helps in making informed decisions: Financial ratio analysis provides small business

owners with valuable information that they can use to make informed decisions about their

business. By analyzing financial ratios, Small business owners can identify areas where they

need to invest more resources and areas where they need to cut back.

5. Helps in securing financing: Financial ratio analysis is an important tool for small

business owners who are looking to secure financing. Banks and other financial institutions use

financial ratios to evaluate a small Business’s financial health and creditworthiness. By

analyzing financial ratios, small business owners can identify areas where they need to improve

to increase their chances of securing financing.

Objectives of the Study

This study was conducted to determine the effect of financial ratio analysis in small

business appraisal in Cavite.

To achieve this objectives the researchers managing profit of elemets in the following;

 Ensuring that your business is earning the correct profit on the sale of its product or

sevices.

 Controlling the level of overhead expenses.

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Statement of the Problem

This study aims to identify the effect of small scale financial ratio analysis in cavite city ,

what is the status of every small businesses in terms of;

1.1 Financial needs

1.2 Customer loss

1.3 Pressure from credit sources

2. what's the most common problem of new entrepreneurs tackling small scale business?

3. how can financial ratio analysis help small business owners and lenders?

Scope and Delimitations of the Study

This study as the case may be covers the relevance of financial ratio analysis in the

appraisal of small scale business with particular reference. The study takes a holistic approach in

its research to unveil the relevance of financial ratio analysis in the appraisal of small scale

businesses.

Limitations of the Study

The limitations involved in this research work include:

-Hostility and non cooperation on the part of the respondents.

-The levels of ignorance on ratios and illiteracy were very high e.g some business officials

refused to answer questions as they felt they would be indicated.

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-Also financial implications were soaring high and this imposed certain restrictions -Finally, the

constraint of time was a limiting factor as all the areas of interest were not covered by the

researcher.

Significance of the Study

This study determine of side from providing insights on efficiency, ratio analysis helps

you understand the profitability of your business. It can examine profits by assessing your sales

turnover against your business expenses. Understanding your profitability can help the success of

your small business.

Definition of Terms

Liquidity: Liquidity refers to the ability of an asset to be easily converted into cash without
significant loss in value. An asset that is highly liquid is easy to buy or sell quickly, while an
asset that is illiquid may take a long time to sell or may require a large discount to attract buyers.

Cash: Cash is the most liquid asset, as it can be easily used to buy goods and services, pay bills,
or invest in other assets.

Financial ratio: A financial ratio is a mathematical calculation that compares two or more
financial variables to evaluate a company's performance, financial health, or efficiency.

Profitability ratio: Profitability ratios measure a company's ability to generate profit in relation
to its sales, assets, or equity. Examples of profitability ratios include gross profit margin, net
profit margin, and return on assets (ROA).

Liquidity ratio: Liquidity ratios measure a company's ability to meet its short-term obligations.
They evaluate the relationship between a company's current assets and current liabilities.
Examples of liquidity ratios include the current ratio, quick ratio, and cash ratio.

Asset: An asset is something that a company or individual owns or controls that has economic
value and can be used to generate future revenue or provide future benefits. Assets can be
tangible or intangible, and include things like property, equipment, cash, investments, and
intellectual property.

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Liability: A liability is an obligation that a company or individual owes to another party. It can
arise from a past transaction or event, and requires future settlement in the form of payment or
other performance.

Benchmarking: Benchmarking is the process of comparing a company's performance or

practices to those of its competitors or industry leaders in order to identify areas for improvement
and best practices.

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Chapter 2

Review of Related Literature and Studies

This chapter contains the researched review done by the proponents about the related ideas

regarding the effect of the financial ratio in small businesses. This chapter constitutes more on

the study of the system literature side.

Foreign Studies

Financial ratio use in small business

Yet, the literature lacks reports of the extent to which various are used by small business

owner/ managers. Furthermore, the impact of the use or non use of financial ratios upon small

businesses has not been given much study. Despite the fact that use of financial ratio analysis by

the small firm has been called of major and overriding importance and essential in ascertaining

whether the small firm is operating efficiently (Brighman , 1979), little empirical evidence exists

of improved profitability or survival in small businesses which use financial ratio analysis as

compared to those which do not.

This study examined the extent to which financial ratios were used in a specific line of small

retail business i.e., independent community pharmacies and tested for a relationship between use

of financial ratios and business success. Specific objectives were to determine: (1) Whether

pharmacies which were closed or sold were ‘low volume pharmacies’ in terms of sales volume,

(2) if fewer financial statements were prepared in closured and changes of ownership than in a

similar group of ongoing pharmacies, and (3) whether there was an association between the use

of financial ratios in making operational decisions and business. (Thomas and Evanson)

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Increasing crisis that affected the small business

The results indicate that during the 2007–09 financial crisis, areas with a greater share of

Small Business Administration 7(a) lenders experienced: (1) a 2.2% increase in small business

loan volume, (2) a 3.7% increase in small firm employment and 3.5% increase in establishments,

and (3) lower loan default rates. According to a bank-county-year analysis, SBA banks increase

their percentage of lending when they are capital-constrained and when the local median income

is lower.

According to Ievgen Balatskyi Victoria Strilec , Sergiy Frolov, the purpose of the article is to

explore small business financial provision and support improvement possibilities using foresight

tools. The parameters for small firms' financial provision are assessed in the study. It provides

the small business financial provision organizational framework. Additionally, it evaluates the

network of relationships between "state-small businesses" in the establishment of financial

support for firms and identifies the major barriers to the full fulfillment of small business

potential. It is suggested to create scenarios for the establishment of small business finance

provision using foresight technologies.

Foreign Studies

FINANCING OF SMALL SCALE BUSINESSES

The major problem affecting the small scale business is finance (money). Most

entrepreneurs are unable to carry out their skills and intelligence due to lack of the

initial capital in starting off the business.

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The banks therefore decided to loan them money for a number of reasons which will

be listed below. This assistance is however, derived from the strong belief that smallscale

businesses have a great role to play in the industrial development of the country.

Other attributes of the small scale business are:

A. Small scale businesses are feeder to large scale industries and service product

made by them.

B. Low level capital required in the establishment of small scale businesses.

C. A more equitable redistribution of income is usually achieved in the small scale

business.

D. The large number of the establishment and their labour. Intensive modes of

operation guarantees employment for a number of persons.

E. Evolution of truly indigenous enterprises is common among small scale business.

F. General enhancement of the tempo of industrial development is visible among

small scale businesses.

G. Intervention adaption and general technological development are common in small

scale businesses.

H. Industry diversification and a relatively more balanced regional development are

assumed.

Despite the importance of small scale business, which is the fuel needed for growth

and development; there are inherent problems with the small scale business for which

urgent action is required.

- Management: most small scale entrepreneurs lack managerial skills and expertise

to operate viable business units. The entrepreneurs and generally first generation

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investor have no previous management experience.

- Inadequate capital: due to the higher real and perceived risks and administration

cost involved in tending to them, this therefore makes capital very scares to the

small scale entrepreneurs and more expensive than large scale businesses.

- Difficulty in having access to raw materials, which may be acquired by their large

competitors because of their superior buying power.

- High cost of capital: A very important element in decision about the use of any

resources is the cost of that resource. In recent years, most financiers in Nigeria

money market have raised the cost of their finance with the sole intention of

scaring away too stable borrowers, it will be meaningless for a small business owner to borrow at

a high cost especially when this cost exceed the return he

expects from the business. He should maximize his returns by avoiding

expensive.

-Improper record keeping: since the attraction of the skilled manpower is impossible,

they find it difficult to recruit and retain skilled labour.

- Inability to raise equity finance.

Unusual collateral: it has been found that some of the unusual collateral required

does not apply to all prospective borrowers but only to those without strong

financial background like the small business person.

As a result of these listed points, banks in Nigeria now shy away from the

entrepreneurs of the small scale businesses thereby leaving them to struggle on their

own for survival.

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Local Literature

Sales and Revenue

The measurement of financial performance can be done using financial ratios or non-financial

indicators that can be developed to serve its purpose and objectives (Shamsuddin et. al., 2018)

One of the key figures in the financial statement is the revenue or sales data. According to

Ganga et.al. (2015), for a business to achieve liquidity, it has to attain its target sales for a certain

period of time; otherwise, it will not be able to pay off its obligation when they become due.

Sales in the market provide feedback on the performance of the product or service of a business.

Sales measure the difference between bankruptcy and success.

The findings of Ganga was supported by Henock, M.S. (2018) who studied savings and credit

cooperative in Ethiopia and thus, suggested that for an organization to be financially

sustainable, it shoudl increase its return on assets and reduce its debt equity ratio and improve

deposit mobilization performance. The financial self-sufficiency can be achieved when the

cooperatives were able to utilize their short term assets to earn cash revenues. Therefore, the

more it utilizes its short term assets, the higher cash revenues earned and this brings higher

sustainability.

The cooperative is said to be owned by the members; they are the number one consumers of its

products. Ninety percent of the sales of the cooperative come from the members as observed

by Opata (2014). Management can increase sales by expanding its area of operation and

encouraging more individuals to join, in this way, sales will not only increase by also the

owner’s equity or the asset of the cooperative.

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The reviewed literature suggests that financial ratio analysis can have a positive impact on

the small business appraisal process in Cavite, particularly in terms of improving decision-

making, risk assessment, and communication among stakeholders. Financial ratio analysis can

help small business owners and lenders identify strengths and weaknesses in different aspects of

their financial performance, such as liquidity, profitability, efficiency, solvency, and growth

potential. By using financial ratios, entrepreneurs can benchmark their business against industry

standards, set goals, and monitor progress over time. Lenders can also use financial ratios to

evaluate the creditworthiness of borrowers, estimate the repayment capacity, and negotiate loan

terms. However, the effectiveness of financial ratio analysis depends on various factors, such as

the quality and accuracy of financial data, the relevance of the ratios to the industry and the

context, the expertise and experience of the analysts, and the ability of the users to interpret and

apply the results.

The literature review suggests that financial ratio analysis can benefit the people of Cavite

in small business appraisal, but there are also challenges and limitations to its use. One of the

main challenges is the lack of financial literacy and awareness among small business owners,

which can lead to inaccurate or incomplete financial statements, misinterpretation of ratios, and

suboptimal decision-making. Another challenge is the potential bias or subjectivity of financial

analysts, who may use different formulas, weights, or benchmarks depending on their

preferences or assumptions. To address these challenges, there is a need for more financial

education and training programs for small business owners, as well as for more standardized and

transparent methods for financial ratio analysis.

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Local Studies

Currently, the Philippines' labor force is in need of accountants as a result of ASEAN

integration. As a result, there is a greater demand for universities to produce graduates who are

prepared to enter the business world. Accountancy graduates' technical and soft skills must be in

sync in order to produce quality graduates. The purpose of this study was to determine the

technical and soft skills matching in relation to accountancy graduates' first job experience. In

this study, a descriptive-correlational design was used. The 70-study sample was obtained

through stratified random sampling. In this study, self-created questionnaires were used. Five

experts assessed the content validity. In the data analysis, percentages, means, standard

deviations, and regression were used. The following information was discovered in the work

profile:

The majority of financial statement analyses concentrate on firms that either contribute

significantly to economic figures or operate in a highly competitive business environment.

Whatever the motivation, financial statement analysis should be made available to all industries

for comparative and benchmarking purposes. So much so for industries like the media, which

quietly propel economic development and growth. The purpose of this research paper is to

analyze the financial statements of two publicly traded companies in the Philippines' Securities

and Exchange Commission in the media subsector for the years 2016-2020 using profitability

ratios such as net profit margin return on total assets, return on equity, and basic earnings power

ratio. The study used a quantitative research design that was focused on financial statement

analysis. (Chester Owen B. Diokno)

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Chapter 3

Research Design and Methodology

This chapter explains the research design, respondents, instruments, procedures, data analyses,

and some ethical considerations related to the processing of the study.

A systematic review of published studies and reports related to financial ratio analysis and

small business appraisal in Cavite and similar contexts was conducted using electronic databases,

such as Google Scholar,Scopus . The search keywords included "financial ratio analysis," "small

business appraisal," "Philippines," "Cavite," "entrepreneurship," "credit scoring," and "financial

literacy." The inclusion criteria were relevance, rigor, and recentness of the sources, as well as

their alignment with the research question.

Research Design

The type of this study is quantitative research that is known for gathering data with the use

of statistical and numerical methods. The design used for this study is non experimental

descriptive design and purposive sampling. The data will be gathered in the form of a survey

questionnaire that is given to the respondents, which are the effect of financial ratio analysis. .

The gathered data from the survey questionnaire were checked and analyzed strictly and

carefully by the conducted researchers. The result of the data provided by the respondents will

give the researchers an idea about the effect of financial ratio analysis to the people of of

cavite in small business appraisal.

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Population and Sampling

A fast food restaurant was selected for study. In order to ascertain whether the instruments
used where valid, some prominent and intellectual
personalities and resource persons especially were asked to vet the questionnaire and
corrections were made. For the reliability to be certified, the instrument used in data collection
(questionnaire) was re-tested through an oral interview with some of the staff to confirm their
responses with the ones they gave earlier. However, the test re- test method was employed to
certify its reliability. The data collection was analyzed using simple percentag method.

Research Instruments
The main tool that will be used in this quantitative study is a researcher-made

questionnaire that discuss the effect of financial ratio analysis to the people of cavite in small

business appraisal. The data that will be collected will be analyzed and the result will determine

the effect of financial ratio analysis in small business appraisal.

II. Data Collection Technique

There are several data collection techniques that can be used for financial ratio analysis on small
scale businesses. Here are some common ones:

Financial Statements Analysis: This technique involves collecting financial statements such
as balance sheets, income statements, and cash flow statements of the small scale businesses.
This data can then be used to calculate financial ratios such as liquidity ratios, profitability ratios,
and solvency ratios.

Industry Comparisons: Comparing financial ratios of the small business to those of other
similar businesses within the same industry can be a useful data collection technique. This
method provides a benchmark for comparison and helps to identify areas where the small
business may need improvement.

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Expert Opinions: Experts in the field of finance or accounting can provide valuable insights
into the financial ratios of small businesses. These experts can be hired to analyze financial
statements, provide advice on financial ratios, and make recommendations on how to improve
the financial performance of the small business.

Overall, the data collection technique used for financial ratio analysis on small scale businesses
will depend on the availability of data, the resources available, and the level of accuracy required
for the analysis.

Generally, the method for gathering data for financial ratio analysis on small firms will depend
on the data that is available, the resources that are accessible, and the degree of precision needed
for the study.

III. Data Gathering Procedures

1. The first thing we did was that we made sure that our research title was viable and that it is
approved by our instructor in Practical Research

2. Then, in order to gather sufficient information for our research, we went to the library and
looked for previous studies and researches made by others to assist us in conducting our paper

3. Once we felt that the data we gathered were lacking, we went online and used Google scholar
and other sites to look for more related studies and literature.

Ethical Considerations

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Ratio analysis was found to be the benchmark for the evaluation of financial position and

performance of a firm. Ratio analysis guides and leads the way of the users of financial

statements. It also enables the management to know the financial strength and weakness in the

system and their root causes. It is a powerful and most dependable tool of financial analysis of

a company. Ratio analysis helps in the summary of large quantity of financial data and to make

qualitative judgment about firms’ financial performance. The relationship measured by ratio is

an index that permits a qualitative judgment to be formed about the firms’ ability to meet its

current obligation and long- term obligation. Ratio analysis should be used by all organizations

not just the small scale business. Also, current data should be used when dealing with financial

ratio. The study recommends that small scale businesses should organize workshops for their

employees on a regular basis so that they can appreciate the role of financial ratio analysis in
the businesses.

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