CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
Return on Assets is one of the measures of financial performance. And financial performance measure is one of the important performance measures for economic units. Financial performance measures are used as the indicators to evaluate the success of economic units in achieving stated strategies, objectives and critical success factors (Katja, 2009). The main objective of financial performance measuring is to determine the operating and financial characteristics and the efficiency and performance of economic unit management, as reflected in the financial records and reports (Amalenda 2010). Financial ratio analysis method is an important measure to financial performance analysis in the economic units because ratio analysis method is the most commonly used financial tool to evaluate the current and past performance in the economic unit and to assess its sustainability (Dick, Feenstra and Wang 2000). Capital expenditure refers to the decisions related to capital budgeting as replacement of equipment or the expansion of plant. This expenditure is basically related to financial decisions of a firm. This should assure that net present value must be generated. Capital expenditure must be directly related to the corporate income in future. There are two kinds of assets in the commercial firms, such as current asset and the non-current assets. The examples of non-current assets are building, land, plant, machinery and equipment, furniture and fittings and others. The productive capacity can be generated by investing in such assets which ensures long term profit range. The kinds of such assets do not change frequently. The basic purpose of the purchase of such assets is to produce and sale more. Assets have significant role in determining the profit ratio of a firm (Smith 1980) There are many reasons why the assets are considered to be important. The non-current assets are about half of the total assets of the manufacturing firm and a greater return on investment can be obtained by having huge level of assets which are not current (Igbal and Mati 2012).
According to Okwo, Ugwunta and Nweze (2012) a firm acquires plant and machinery and other productive non-current assets for the purpose of generating sales. Therefore, the efficiency of non-current assets should be judged in relation to sales. Generally, a high non-current assets turnover ratio indicates efficient utilization of non-current assets in generating sales, while a low ratio indicates inefficient management and utilization of non-current assets. Thus a firm, whose plant and machinery has considerably been depreciated, may show a higher non-current assets turnover ratio than the firm which has purchased plant and machinery recently. By comparing the non-current assets turnover of the two firms, it cannot be conclusive that the former is more efficient in managing non-current assets because of the effects of depreciation. The asset turnover shows how much sales are generated for every N1(one naira) of capital employed. A low asset turnover indicates that the business is not using its assets effectively and should either try to increase its sales or dispose of some of the assets. Ibam (2008) opined that a company’s investment in non-current asset is dependent to a large degree, on its line of business. Some businesses are more capital intensive than others. Firms in the natural resources just as firms in the brewery industry and other industry producers require a large amount of non-current asset investment and large capital equipment while, service companies and computer software producers need a relatively small amount of non-current assets.
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