CASH FLOW RATIO AS A MEASURE OF PERFORMANCE OF …

[Pages:309]CASH FLOW RATIO AS A MEASURE OF PERFORMANCE OF LISTED COMPANIES IN EMERGING ECONOMIES: THE GHANA EXAMPLE

By

MAXWELL SAMUEL AMUZU MBA, CA (GH), MPMA, CMC, Fdip, MWIAMC, CIPM, ACIA, FIPFM

Matriculation Certificate: 8965

A dissertation submitted in fulfilment of the requirement for the Degree of Doctor of Philosophy St. Clements University Turks and Caicos Islands

March, 2010

Supervisor: Dr. Yasmin Yusof

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DECLARATION I certify that this thesis does not incorporate without acknowledgement any material previously submitted for a degree or diploma in any University; and that to the best of my knowledge and belief it does not contain any material previously published or written by another person where due reference is not made in the text.

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DEDICATION This research is dedicated to the Almighty God for his guidance and protection. In addition, it is dedicated to my immediate family, Netoline, Mildred, Maxwell Jnr. and Kelvin.

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ACKNOWLEDGEMENT I wish to record my appreciation for the guidance, support and comments to my supervisor, Dr. Yasmin Yusof for her effective supervision. Furthermore, I am indebted to the various authors whose works provide the relevant inputs for this research. Finally, to God be the Glory.

Maxwell Samuel Amuzu St. Clements University

2010

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ABSTRACT This document discusses a research project regarding the use of cash flow analysis in determining enterprise competitiveness. Cash flow analysis is thought to be more effective in determining enterprise effectiveness and competitiveness in the market because it is a more dynamic examination of actual return on assets and equity. Additionally, this unique use of cash flow analysis is applied to the concept of emerging markets and the proposal that cash flow analysis is a better measure of performance and competitiveness for firms that are competing in emerging markets. This research project relies on a qualitative methodology and employs the action research methodology to address the problem statement and rationale.

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TABLE OF CONTENTS

Declaration

2

Dedication

3

Acknowledgement

4

Abstract

5

Table of Contents

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Chapter I: Introduction

13

1.1.1 Importance of cash flow ratios

16

1.1.2 Use of cash flow ratios as a predictor to failing business

20

1.1.3 Relative performance evaluation using ratios

24

1.1.4 Accounting for and reporting cash flows

25

1.1.5 Financial statements information and the role of cash flow statement 26

1.1.6 Cash flow classification

31

1.1.7 Sustainable cash flows

36

1.1.8 Cash flow and equity investors

38

1.1.9 Cash flow and lenders

39

1.1.10 Use of cash flow ratios in solvency testing

40

1.1.11 Drawbacks of a cash flow analysis

40

1.1.12 Cash flow data ratios

41

1.2 Conceptual framework

59

1.3 Objective of the study

61

1.4 Working hypothesis

63

1.5 Research scope and methodology

63

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1.6 Preview of subsequent chapters

65

Chapter II: Literature Review

66

2.1 Introduction

66

2.2 Importance of cash flows in predicting the performance of a firm

69

2.3 Assessment of the application of operating cash flows by creditors

71

2.4 The functions of cash flow as a result of operations

74

2.5 Corporate governance vs. the valuation and performance of a firm

78

2.6 The performance and valuation of a firm with its corporate governance

80

2.7 A preview of Ghana as an emerging economy

85

2.8 Economic reforms in Ghana

85

2.9 Assistance to Ghana by Donors

87

2.10 Ghana's capital market

87

2.11 Conclusion

90

Chapter III: Data Collection and Presentation

91

3.1.1 Setting of the present research

93

3.2 Methods of data collection / presentation

107

3.2.1 Approaches to data collection

107

3.2.2 Archival data sources

110

3.2.3 Collection of industrial data on Ghana and the United States

111

3.2.4 Sampling and its types

117

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3.3 Descriptive data 3.3.1 Descriptive statistics 3.3.2 Data presentation 3.3.3 Profile of the selected companies for comparison

3.4 Quantitative data 3.4.1 Data, information and knowledge 3.4.2 Type of data used 3.4.3 Derived quantitative data 3.4.4 Other classifications of quantitative data 3.4.4.1 Cross sectional and time-series data 3.4.4.2 Benchmarking using quantitative data 3.4.5 Financial statements analysis 3.4.6 Description of the 9 financial ratios calculations (Giacomino & Mielke) 3.4.7 Absolute and relative information 3.4.8 Time aspects

3.5 Ethics in research 3.5.1 Anonymity and confidentiality

3.6 Conclusion

Chapter IV: Analysis of Data and Test of Hypothesis 4.1 Introduction 4.2 Quantitative data analysis

127 127 218 130 134 138 140 142 143 143 143 145

150 151 152 154 157 159

162 162 163

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