University of Nigeria

Research Publications

NGWU, G.I.

PG/M. Sc./96/22976
An Analysis of the Financial Structure and
Profitability of Rice Enterprise; The case of
Title

Adarice Project Participating farmers in

Enugu State, Nigeria.
Faculty

Agriculture
Department

Agricultural Economics
Date

January, 2000
Signature
A N ANALYSIS OF THE FINANCIAL STRUCTURE A N D ,
PROFITABILITY'OF RICE ENTERPRISE: THE CASE OF
ADARICE PROJECT PARTICIPATING FARMERS IN
ENUGU STATE, NIGERIA

NGWU, GODWIN ILOABUCHI

PG/M.Sc.l96/22976 J~

DEPARTMENT OF AGRICULTURAL ECONOMICS

UNIVERSITY OF NIGERIA, NSUKKA

JANUARY, 2000 >a-

.
 A N ANALYSIS OF THE FINANCIAL STRUCTURE AND
PROFITABILITY OF RICE ENTERPRISE: THE CASE OF
ADARICE PROJECT PARTICIPATING FARMERS IN
ENUGU STATE, NIGERIA

A DISSERTATION SUBMITTED T O THE DEPARTMENT OF

,AGRICULTURAL ECONOMICS, UNlVERSlN OF NIGERIA,

NSUKKA, IN PARTIAL FULFILMENT OF THE REQUIREMENTS

FOR THE AWARD OF MASTER OF SCIENCE (M.Scj DEGREE IN
AGRICULTURAL ECONOMICS a
s, I .
, t : ":i

*.=I": :, #-

NGWU, GODWIN ILOABUCHI

PG/M.Sc./96/22976
.

JANUARY, 2000
 CERTIFICATION

NGWU, Godwin Iloabuchi, a postgraduate student i n the Department of

Agricultural Economics, University o f Nigeria. Nsukka, with Registration Number

PG/M.Sc./96/22976, has satisfactorily co~ilpletd the requiren~ent for the course and

research work for the degree of Master of Science (M.Sc.) in Agricultural Economics.

Tile work embodied in this dissertation is original and Iias not bee11subnlitted ill part

or furl for any other diploma or degree of this or any other University.

Dr. C.J. ARENE

( SUPERVISOR)

11 /s-/zL-
DATE
 iii

DEDICATION

To my noble parents, O ~ If Ii x- Eguluutuurryurnu Ngwu und

Mm Regina Nwaju Ngwii, on whose bockground my

academic height was builf.

 ACKNO WLEDCMENT
I am highly indebted to my mother, Mrs Regina Nwaja Ngwu, whose support and
sacritices have sustained me in my acatlemic pursuit. My special thanks go to my uncle,
Mr. Fabian 0. Ngwu, and my cousin, Ozor Emmanuel C. Igwe, who opened for me a
gateway into the study of agriculture.
My gratitude also goes to my supervisor, Dr. C.J. Arene, for guiding me in the
course of producing this work. The et'torts !,I' the staff of my Department in directing
- nit:

w e l l were not forgotten, especially that ot' Mr. Urania, K . C . , Prof. S. A. N .D.Chidebelu
and Dr. K. Oji. I have not forgotten tllc moral support and encouragement of my friends
which have all along been motivating nit: towards the success of the programme, notably
that of Mrs A.1. Achike and Mr. Ugwuuda, C.C., Mr. Ulo Victor, Mrs M. Oghonna. Not
also forgotten is the marvellous effort of' Sunday Odo and Etugo, James who were the
pillars of my successful data collection 21 Atlarice project*'
I am also i~idebtecito Adarice
c.
project in Uzo-Uwani Local Governn1t:nr Ar-ea, Enugu State whose matrrals Ilrlped nw in
writing.my work. Those whose names were not mentioned Irere and who have in one way
or the other contributed to the success of' this work and my programme, 1 owe my sincere
gratitude.
Most indebted to is the Almighty <;od, who 113s all along been with me, supplying
me all the resources that were used in ~n;lkingt h i h work ;und my Ivogramlne a reality.

Ngwu, G.1,.
Dept. of Agric. Econoniics,
University of Nigeria,
Nsukka.
January, 1999.
 A IJS'~'I<I\CT

In order to help local farmers i~llproveon their rice production technique amongst

other objectives, Adarice project adopted the participating farmers' scheme. Currently, the

farmers engaged in rice production have reduced in number from one thousand in 1988 to

three hundred and fourteen in 1998 rainy season with a lot of empty, uncultivated fields

. wasting away. Consequently, the study analysed the financial structure and also ascertained

the.profitability of the enterprise in order to determine whether they are the causes of the

farmers' withdrawal from further producrion or not. Broadly, the study was an analysis of

the financial structure and profitability o f rice enterprise of Adarice project participating

farmers in Enugu State, Nigeria. The spxil'ic objectives of the study were to describe the

socio-economic characteristics of the participating farnlers; analyse the financial structure of

the participating farmers' rice producrion enteprise; ascertain the profitability of the

enterprise during the pre-harvest and post-harvest periods; describe the management

problems from the view points of the prqiect's officials aid the participating farmers; and

prof+r recommendations based on the study's f i d ings.

The study area was Adarice pruiecr in UZO-~wani

Local Government Arrd of

Enugu State. The data required for the objectives (i) and (iv) were obtained by using two

sets of stru.ctured questionnaire acln~inistered on both the project officials and the

participating farmers. For objectives (ii) ; ~ n t l(iii). the data for the period of study and

which are time-series were collected fro111the financial records of the participating farmers.
 Data on objectives (i) and (iv) were annlysed using descriptive statistics. Data on objective

(ii) were analysed using financial statements while data for objective (iii) were analysed

using Net Profit Margin (NPM) tecl~~lique,Analysis of Variance and Student's t-

distribution.

The results showed that most ol the participating farmers were males (82%) and

were married (67%). The productioli enterprise was tedious and exhausted time, energy,
-
finance and other resources from the farmers. They showed also that most of the farmers

had First School Leaving Certificate (FSLC) (47%)and West African School Certificate

(WASC)/Teachers' Grade 11 certificate ('1'CII) (33%)and were able to keep good records.

The Balance Sheet Results showed that 11)efarmers had no intermediate and fixed assets and

-
medium and long-term liabilities of their own. They relied on the project for the fixed

and intermediate assets like land, maclii~icryand equipment , irrigation and storage facilities

as well as on external labour. They oper,~~ccI

only current assets and currelit liabilities. The

current assets and current liabilities incrm+xI over the years in the period covered by the

study for the cultivation of the same plot of land. The Net Profit Margin (NPM) technique

results also showed a reducing trend olmined progressively over time within the period

covered by the study. The results from the Analysis of Variance and t- distribution showed

that there is a significant difference between the profitability of the enterprise during the

pre-harvest and post-harvest periods. Data generated also indicated that the project's

management had the problems of ineficilwr personnel ;in<! funds anlongst others as viewed
 vii

by the project officials. As viewed by the participating farmers,,the nianagement problems

encountered included high cost of production and capitallfinance amongst others. Bared on

the findings it was recommended that amongst other things, soft loans should be provided

by the government to the farmers to enable them overcome their capitalffirlance problems.

The management of the project shoud be resrganised and the staff catered for.
 viii

TAHIX 01;CONTENTS

Title page .................................................................................................... . i.

. -
Cenitlcation ................................................................................................... . 1. 1.
Dedication .......................,......................................................;........................ 1 1 1
Acknowledgement..,..........................,................................................................ iv
Abstract ......,...................,..............................................,........................ .!, ...... v
Table of Contents ..........;.................. .........................................,.....................vii
List of Tables ................................................................................................... ix

CHAPTER ONE: INTRODUCTION ..

- 1.I Backgrtwncl Infirmation ............................................................................. I
1.2 Problem Statement ....................................................................................8
1.3 Objectives of the Study .............................................................................. 9
. 1.4 Research Hypothesis................................................................................ 10
1.5 Justification for the Study .........................................................................10
1.6 Limitations of the Study .......................................................................... I I I

CHAPTER TWO: REVIEW OF LITERATURE ............................................... 13

2.1 Rice Production......................................................................................

I2
2.2 Financial Statements ................................................................................20
2.3 Financial Ratio Analysis .......................................................................... 29
2.4 Capital Gtructure ahil its Decisions ..............................................................36
2.5 Investment and its Decisions ......................................................................50

3.1 The Study Area ......................................................................................56

3.2 Sampling Procedure ................................................................................58
3.3 Data Collection ......................................................................................
59
3.4 Data Analysis ........................................................................................
60

CHAPTER FOUR: RESIJLTS AND DISCUSSIONS ............................................66

CHAPTER FIVE: SUMMARY. CONCLUSIONS AND RECOMMENDATlONS ..... Ill
5.1 Summary ............................................................................................. 111
5.2 Conclusion............................................................................................It4
5.3 Re~ommenclations.................................................................................. 115
References / ....
.......,........................................................................................ 118

Appendices ................................................................................................. 122

 LIST OF TABLES

Table
1. Sex of the Participating Farmers .... ..... . ...... . ... .... . . ... ... .............. .... . ...... ...66

2. Age Distribution of the Respondents . ... . . . . . . . ...... ............................... . .....-67

3. Marital Status of the Respondello:.............. . . ........................................... 69

4. Highest Educational Attainment o f LIE Kespor~denu;....... .... ..... ....... .... . . . .. . . ...70
-
5. .- Family Size of the Respondents . .... .... .. .. . .. . . .. . ..... ... ... . . . .. . .......................59

6. Years Spent with Adarice as Participating Farmers by the respondents .... .........60 .
7. Rice Participating Farmers and die cultivated Hectare in '1998 Rainy Season
Rice Cropping.......................... ............ ......................................!. ...-75

8. Mean Values (W) of Balance Sheet Items of 0.5 Ha.Plot as at Ilecenlber 3 1 ,.... .76
9. Mean Values (W)'of Income Statemen1 Items o f 0.5 ha Plot as at Ilecernber 3 1 .79

10. Mean Values (W) of Statement of Ch;lnges i l l Re~ailiedllarriiligs Irem of

0.5 Ha as at Dtxeinber 3 1 ,... . .. ... . ...... . . .. . . . . . . . . . . . . . . . . . . . .... . . . . . ... . . .. . . . .. . . . . . .8I

11. Funds Statement of the Respondents ......... ..............................................84

12. Percentage of the Kwpolldenw who souscctl tlic ir C'i~pi~al~l~r~ouy11 Savi~~gh

only. Borrowings ody",%oth . . ..... ... .... . ... . . . . ..... .... .... .. . .. ............... . ........ 84

/
14. Mean Values of Equity/Total Assets Ratio lrems of 0.5 Ha Plots as at December
3 1 ,..,........ . . ..... . .... . ..... . ... . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .. . . . . . .. .. . . . .. ... .88

15. Mean Values of Debt/Total Assets Ratio Irerns of 0.5 Ha Plots as at I)ecemt>er
31 ,................................... .... ..... .. . . ... ......................., ...................89
 X

16. Mean Values of Current Ratio Items of 0.5 Ha Plot as at December 31 ,...........90
17. Mean Values of Quick Ratio Ite~ils'of 0.5 Ha Plot as at December 3 1 ,............ .91

18. Cost of the Operations (N)of 0.5 Ha. plot as at ~ecember31,: ......................92

1 Mean Values ( # ) of Gross Inmile Items of 0.5 Ha Plow at December 3 1 ,......93

20. Mean Values ( W ) of Net Income Item of 0.5 Ha Plot as at December 3 1,. ........93

Mean Values of Gross Profit Margin Jtelils of 0.5 Ha Plot as at December 3 1 ,....94

Mean Values of Net Profit Margin ltelils of 0.5 Ha Plot as at I)ecember 3 1 ,.......96

Mean Values of Operating Ratio Ite~nsol' 0.5 1 la Plot as ;\I Ilecmber 3 1 ,. ........9X
Mean Values of Return on Fi~rlner's(owner's) Equity (ROE) Items of 0.5
Ha Plot as ;I[ Dwcniher 3 1 . ..........................................................09
Meal Values 01' (lie Various PI-,)~.ir:~l)il ! : C I ~ ! Y t ,,!,.-,
r
! !; !'h111 l'r~4~;1rw:~1
and Post-harvest Periods as at l)ece~nber3 1 . 1993- 1997 ............................. 1 (HI

t-Statistic Values for Two- paircd Sarilplcs: Mean Values of Various/

Profitability Item of 0.5 Ha. P k r at Post-harvest and Pre-liarvest Pericnis
as at December 3 1 , 1993-1997............................................................10 I

27. Problems encoun'kred in Adarice Production Project as viewed by the

...
Project Ott lcials.. ............................................................................I 04

28. Problems Encounte~edin the Adarice I'~wluction Project as viewed by [he

Participating Far~ners....................................................................... I07
 C-R ONE

1.0 INTRODUCTION
1.1.1 Background Information

In 1962, the Government of Eastern Region of Nigeria acquired two parcels of land

measuring about 500 hectares each at Omasi and Adani at the Uzo-Uwani area of Enugu

Province of Eastern Nigeria. The parcels of land were ear-marked for the establislln~entof

the former Um-Uwani Farm Settle~neritScheme. Progress in the establislinient of the

scheme was interrupted by the Nigerian civil war as only two f i r m sctcleme:lt villages ou~

of the five proposed had been set up.

After the civil war, the Government of East Central State of Nigeria abrogated tlie

Farm Settlement Scheme as contained in the East Central State Council co~~clusion
No 7242 .

circulated on 20th April, 1972. Collsequently, the above parcels of land by deed of

conveyance dated 17th day of February, 1975 and registered as No 55 at page 55 w vol urne

2 of the h n d Registry at Enugli wrrt. h ~ d e t over

l ro 111e I>ist Cc~ltr;tlSti~leAy.ricul~irr;~l

Development Authority (ECSADA) which paid all the arrears of relit a11d collil)tBlls;\iii)ii
IOI

economic trees to the land owners (Adani, lpga and Olnasi co~n~nunities)
for the period

1970 to 1974.

The ECSADA which was established by Edict No 13 of 1973 incorporated tlie

Adarice Production (Nigeria) Liniltul in 1975 and placed the company in ~ossessionof all
 the land and property which hitherto constituted Uzo-Uwani Farm Settlement. Tlir

ECSADA further recommended that the World Bank Rice Project (WBRP) now Enugu

State Rice Project (ESRP) be located at the former Uzo-Uwani Farm Settlement. This is lo
government
enable Adarice function as an executing agency for the WBRP now ESRP. The tl\el~/ -
partitioned the available irrigable land (1,120 hectares) at the location to Adarice (720

- hectares) and the WBRP now ESRP (400 hectares). The Adarice Production Project and [he

~ R nowP ESRP are separate independent organisations. As of now. Adarice Produc[ion

Project (Nigeria) Limited has only 720 hectares as against 1,000 hectares upon which iu

feasibility studies were based. The four hundred hectares of farm land was carved oul from

the 1,120 hectares following the action of the State Government in 1976.

In March 1974, an agreement ,was signed between the ECSADA and the Nippon

Koei Company Limited, a Japanese firm of Consulting Engineers for investigations and

planning on the agricultural development in the Do-Anambra rivers area. The objectives ut'

the agreement are to assess the agricultural development potential in the said rivers area ~LS

well as to select priority development areas and to set up the development programme.

Field investigations for the project were conducted by experts of Nippon Koei

Company Limited and the project planning report embodying the projects gencral features

waq worked out and submitted to the former ECSADA.

 Out of the gross area of about 100,000 hectares in the Do-Anambra rivers area,

28,000 hectares in 7 independent project areas were recognised as net irrigable areas on

account of topography, soil characteristics, availability of water sources, and so on (See

Appendix 2). Rice has been envisaged as the main crop to be cultivated in these project

areas in view of high land productivity of this crop and of general observation of tlie

- physical condition of the area being favourable to growing rice under irrigated condition.

In selecting priority areas to bc first developed, econornic co~nparisonwas ~nade

with regards to each of the 7 projects and the following two projects were chosen:

(i) Uzo-Uwani Pioneer Irrigation Project ... 1,000 hectares

(ii) Lower Anarnbra Irrigation Project ... 5,000 hectares

In these areas it was planned to provide irrigation and draimge canal systems, farm

roads, administrative offices as well as rice mills. For rice cultivation, double croppilig

system in a year was introduced under mechanized farming method.

The contract and extension thereof expired on 31st March 1979 arid tlie Japanese

experts withdrew from the company between May and June 1979. The Japanese were able

to clear all the 720 hectares of Adarice and develop most of them for ~nechanized irrigated

rice cultivation. Adarice also supplies water to the 400 hectares of WBRP now ESRP.

With effect from 16th June 1979 to date, the burden of inanagement of the project

1% been on the shoulders of the indigenous staff. It has been a unique experience affording
 immense opportunity for staff develop~iientand initiative.

On the creation of Enugu State out of the foniier Anambra State, the owriersli ip of'

the land and Adarice naturally rested dn the Enugu State Government. However, proper

demarcation of the boundaries and sharing of assets by the two states were yet to be

effected .

_ 1.1.2 Objectives of the Project

The objectives of establishing Adarice Production Project (Nigeria) Lim i ted

included:

(i) teaching farmers modern methods of rice production;

(ii) providing food for the teeming population of Nigeria;

(iii) raising the standard of living of the rural dwellers; and

(iv) diverting the trend of migration from the urban to rural areas.

1.1.3 Operational System of the Production Department

The operational system of the Production Department as designed by the Japanese

and which worked well during the period of their stay is highliglited below.

( I) Introduction

This operational system was arranged for oftice workers in the Producriori

Department'which has been carried out until the end of March, 1979.

The organisation of the Production Departnlent consisted of die plantation. courrol

and farm machinery sections. The plantation section consisted of six zones and the pilot

farm, and this section was responsible for commercial rice protlucrio~land dgrono~iiic

research works. The control section was responsible for rice ~n~lling
and cn~itrol01' l'i11.111

inputs and labourers. The farm machinery section was responsible for operation, repair and

n~aintenanceof farm machinery.

The operational system was as mentioned below:

Planning

Production Target: The production target was fixed by the Director of Productiori

Department (DPD) in consultation with the Mechanical Engineer and llie

Agronomist. This production target was subject to General Manager's approval.

Cropping Pattern: The cropping pattern covering all paddy fields was designed on

the basis of the production target which has been fixed. The cropping pattern was

prepared by the Agronomist in consultation with the Mechanical Engineer a1111

subjected to the Director's approval.

Operdonal Schedule: Based 011 the cropping pattern, all sectioilal lieacls Iiacl [o

prepare detailed operational schedule embodying such details as

Farm inputs requirements;

Labour requirements;

Development of Agricultural machines; and

 (iv) Others

and subinit it to the Director for approval.

1.1 -4 Achievements of the Company

Within the same period, the company has been able to develop the followirlg
infrastructure:

_ (i) Land reclamation and construction of 720 hectares paddy fields for far~ners:

(ii) 85 km of roads and bridges;

(iii) 14.10 km of existing and new main canals;

(iv) 7.33 of secondary canals;

(v) 52. 1 km of distribution canals;

(vi) 52.66 km of drainage canals;

(vii) 16 units of houses and 9 warehouses/stores;

(viii) acquisition of modern milling machineries;

(ix) part construction of foundations and other infrastructure for the rice mill building
and machineries; and

(x) installation of irrigation structures in 500 hectares.

1.1.5 Paddy Production

By the end of the year 1980, direct paddy production had accumulated to 587 1.29

tonnes from 1565.8 hectares yielding 3.688 toniw per hectare on direct production (See

Appendix 4).
 Following the growing consumer preference for long grairl ricc varicties, i i ~ c r w ~ ~ i y

hectares of the varieties were being embarked upon. And as the varieties twd to prcxluce

low average yield per hectare, this factor has contributed, to noticeabk reduction in

projected paddy production.

Participating farmers planted an area of 34.0 hectares which gave a paddy

- production of about 650 tonnes (see Appendix 3)

li1.6 Operation of the Company: The Participating Faraw~sScl,eme

The company was planned to carry out direct mechanized rice cropping, processing

aud marketing of milled rice and allied products.

However, owing to financial problems and in order to reduce c o s ~cui~triburt:

, in ;I

very meaningful way to Anambra State Governlneni's rural dcvclopn~cnr~ c i i e ~ Ilclp

~ ~ elocal
.

farmers improve on the rice production technique and consequently increase I heir f;trm

income, Adarice adopted a forward looking rice production programme - tlie Participitting

Farmers Scheme in which farmers are to grow rice under the technical guidance ot' the

company. In this scheme, land developed for mechanized and efficient irrigated rice

cultivation was allocated to rural farmers. This method was adopted tirst in 1979. Scientific

method of rice cultivation acquired from experts through the project's various contacts with

reputable organisations, research centres and development in the project's pilot farm were

made available to die participating farmers. In addition to extension education, meclmized

 farm operation services such as land preparation with tractors, herbicides and irlsecticidcs

application and harvesting with combines were also rendered to the participating farmers.

Tlie farmers in turn sold the rice paddy produced to the company for processing. Through'

the project's efficient irrigation water supply, farmers were able to cultivate two crops in a

year without water requirement5 hazards. Furthermore. pure seeds of the rice varieties wirh
- '

propensities for high yields and other desirable f;t;\tiii,.; xVcrc y o d w r t l by Adi~rice; I I K ~

made available' to the farmers.

Backed with the know-how a~ld.the company's efficient re-purchase scherntt, alul

prompt payment for all paddy produced, the company was at the early years uf operatior?

unable to accom~nodatethe fast growing number of farmers who wished to benefit from the

positive resul t-oriented, profit motivated programme for participating farmers. Recausc ot'

its promising method of agricultural and rural development, the scherne artracretl iI large

nurnber;,of farmers, (over one thousand) around and outside Adani.

1.2 ,Problem Statement

, . Since the management of Adarice project shifted to the i~ldigenousstaff in 1979.

die company .ha$been experiencinga series of difficulties which greatly liamper i s overall

performance. This has resulted in making the capacity of rice productioll is thc xc;l 10 Iw

underutili7Rd.. , . . . .
 Currently, the farmers engaging in rice production in the pro-iect area have reduced

in number from one thousand in 1988 to three I~undrecland fourteen in 19g8 rainy season

rice with a lot of empty, uncultivated fields wasting away. Hesides, the area of l a d ullder

cultivation by the farmers currently engaged in production 11as rwlucccl clra~slically1'1-\1iIl I'iw

l~ectaresper farmer to a a threqwier hectare per a farmer.

Considering the fact that Adarice PI-ojecthas a great potential to generate revenue
-
and improve on rice production not only for the farmers by also for the entire nation, an

. analysis of the participating farmers' financial structure, costs and returns on their

investment as well as its profitability became worthwhile. It became also imperative LO

determine the causes of the reduction in both the population of the p;irticiparing filrli~rru

from one thousand in 1988 to only three hundred and fourteen (314) in 1998 currenr r i ~ i n y

season rice cultivation and the area under cultivation.

1.3 Objectives of the Study

Broadly, the objective of the study was an analysis of thc I'it~a~~cirtl

siruc~u~-u
a~ltl

profitability of rice enterprise: the case of Actarice project pa-ticipa~ingfarmers in iltlugi~

State, Nigeria.

Specifically, the objectives were to

ti) describe the socioeconomic characteristics of the participating farmers;

(ii) analyse the financial structure of the participating farmers' rice production

enterprise;
 ascertain the profitability of the enterprise during the pre-harvest and post liarves[

per ids;

describe the management problems from the viewpoints of the project's officials and

the participating farmers; and

proffer valuable recommendatio~lsbased on the study findings.

Research Hypothesis

The Null hypothesis to be tested is that thert: is no signit'ica~ltdiivferenct:IXI\LL-L*I~ IIIL

profitability of the rice enterprise during the pl-e-harvest and post-harvest periocls.

1.S Justification for the Study

The objectives of Aclarice project and the participating fmners' scllelne in the

project include amongst other things provision of food for the twining pupulatiotl 01'

Nigeria, helping the rural farmers improve on their rice produc~ion ~ n e r l ~ dand
s

consequently increasing their farm income thereby raising the standard of living of thc I ~ ; I I

dwellers. This can only be achieved through emuring that the participtlting fartilers are

progressive in their production enterprise.

The study is relevant since it will enable tl~cpocen~iaiand co~npetiry itlvcstos~

determine the firiancial position and profitability of the rice production invest men^ in the

area. It will also guide them in their financial bala~lcingill leruis ol' adjust~nentsol' llicis
equity and borrowed funds to enable them invest profitably. It will also help the government

to understand the problems of the farmers in the production enterprise with a view to

improving food production in Nigeria through helping the farmers. It will also help tile

government to understand the current link between the management of the project and the

participating fanners based on the production enterprise's performance so as to make

necessary management adjustment for efficiency of rice production in the project area.

1.6 Limitations of the Study

The scope of the study was limited to the participating farmers of Adarice pro.ject. 11

was also li~nitedto their ricc prOCI~~iio11

c~iicrprisei n yrc!jccr iuca wirhill [he ~)eriod

covered by the study, that is, from January, 1 , 1993 to December 3 1 , 1997.

In the course of collecting the dam, the research was carried out during lie Iilr~ni~ig

period and hen& farmers were not easily accessible in their homes by the researcher until

late in the evening and in the night. Also some of the farmers were illiterates and could not

keep farm records as such the researcher found it difficult to get accurate information on the

time-series data from them.Hence, the reliance mostly on the time-series data provirled hy

literate farmers who kept good records of their rice product ion activities.
 CHAPTERTWO
2.0 REVIEW OF RELATED LITERATURE

Review of literature was done on the interrelated aspects of the study. They include

rice production, economics of rice production, financial statements, capital structure and

investment decisionsJprofitability.

- 2.1.0 Rice Productio~~

2.1.1 Economics of Rice Production

Rice, QJ, which originated in an area extending from South India to China

has become the world's most important cereal (Komolafe a d., 1980; Anyanwu et d.,
1982). It is unique in that it can be grown under such a diversity of environ~nerrtal

conditions. Thousands of varieties are produced throughout the world. Rice provides a

large population of human food more than any other single plant and is particularly all

essential source of food in countries where the population is dense (F.A.0, 1966).

Geographically, most of the rice area in the developing world is found in Asia,

about 90.9%. Latin America follows with 5 . 5 % , Africa, 2.8% and Near East, 0 . 8 %

(Dalrymple, 1986).

Nigerian rice began in the 1920s at Moor Plantation, Ibadan. A rice researcli

station was established in 1953 at Badeggi for irrigated rice. From 1954 to 1981, 25

varieties were released to Nigerian farmers as the Federal Agricultural Research Oryzae
(FARO) series. International Rice Research Institute (I RRI) varieties particularly I R8 and

IR5 arrived at an early date. International Institute for Tropical Agriculture (IITA) supplied

about two tomes of IRRI 20 seed multiplied from stock brought from International Rice

Research Institute in 1970 (Dalrymple, 1986) National Cereals Research Institute (NCRI)

since its inception has released 50 varieties of rice to farmers, 7 of them in 1983 alone, 5

for upland ecology and 2 for irrigated lowland. In addition West African Rice

~evelo~ment
Association (WARDA) distributed 7 elite lines for on-farm testing in Nigeria

through the National Accelerated Food for the Peoples Programme (NAFPP) - ITA 32 1,

ITA 33 1 and IDSA 10 for upland, ITA368 for lowland, Cisadane for gall-midge endemic

areas, TOX 31 18-6 for irrigated lowlands and suakoko 8 for Iron roxicity problem areas.

Meanwhile the International Network for Genetic Evaluation of Rice in Africa (INCXK-

Africa) also based at Ibadan has built a network of rice researchers in 3 1 African countries

cutting across ethnic, linguistic and geographical barriers to address rice improvemenr

techniques in Nigeria (Edemodu, 1994).

After Sierra-Leone and Ivory-Coast, Nigeria is the next largest producer of ricc i n

West Africa. The area under cultivation grew from less than 118,000 liectares in 1960 to

about 346,000 hectares in 1978. The average yield has risen from about 800 Kglha in 1960

to over 1,600 kg/ha in 1978. Given these rapid increases in the area under cultivatio~iarid

yield Per unit area, Nigeria's aggregate rice production has risen reniarkably from about
 95,000 tonnes of paddy in 1960 to over 579,000 tonnes in 1978 (F.O.S., 1979)

This particular growth in rice production can be attributed to a variely of factors

among which are the r;ipidly i.isir~g pur capita for rice incent ivcs, rice rcscarch a r ~ l

extension activities of the government, the price incentives and the impact ut' h e Naric111;ll

Accelerated Food for the People's Programme (NAFPP) launched by the Federal Miliwy

- Government (F.D.A., 198).

The remarkable rise in domestic production has, however, not kept pace with the

more rapid increases in rice imports within the past decade. For instance, rice imports have

now become an important drain on Nigerian foreign exchange carnings resulting in 1111

import bill of over N158 million naira in 1978 (F.M.T., 1979). Despite guvernments ban

on importation of rice into the country, Nigeria has been importing about 2 16,O(K)wnnes 01'

the commoditygvaluedat over N1.3 billion (about S 60 million) annually (Edemodu, 19%).

But the ban has increased lcml production to 1.3 millio~ltonnes annually since

1989, with cultivation covering about 1.7 mill ion hectares in N iger ia. 'The i~wrtase in I t ~ r d

cultivation has brought about fair price competition between local rice and its imported

counterparts. Although rice consumption and production had increased substatltially. dw

consumption rate was still much higher than the production rate (Edemodu, 1994).

2.1.2 Systems of Rice Culture

The systems of growing rice and the soil and the crop management practices
 evolved for each system are complex and somewhat unique. The systems were developed
i
1
to suit specific environments and socio-economic conditions of the farmers, which makes a

single classification system for the rice lands -one using all the production factors -
/

extremely difficult. Instead, several clasification items based on each area's or country's

rice production system are followed (De Datta, 198I).

. For West Africa, rice culture car) be classified into four main types and eight sub-

types based on climate, soil conditions, water regime and tt.nhnological level of agriculture.

They include upland (dryland and hydromorpl~ic),irrigated, inland swamp (nontoxic and

toxic soil) and flooded (riverine s!lal low, riverrine deep, bo1iland and mangrove)

(Buddenhagen, 1978).

Using West Africa Rice Developr~icntAssociation's (WARDA'S) classificatign, five

basic t y p of iice produciion systems call be distinpuisl~edin Nigeria. They include uplmd

or rain-fed rice cultivation, mangrove or tidal swamp rice, deep water/floating rice, inland

or shallow swamp or Fadarna rice and irrigation rice (FDA, 1978).

Rice culture also. b classified according to source of water supply as rain-fed or

irrigated. Based on land and water Inanagemelit practices, rice lands are classified as

lowland (wet land preparation of fields) I k Datta, 1981; Grist and Lever, 1969).
2.1.3 Upland or Rain-fed Rice Production

Upland rice cultivation is the major rice production system in Nigeria, accounting

for approximately 55% of the total area under rice in 1975 and approximately 43% of

Nigeria's rice output. This system of rice production is very predominant on the Southern

part of Nigeria (FDA, 1978). The system is, however, common in the north although its

lower yield makes it less popular than Fadama rice production (WARDA, 1981). With

effect from 1974, when the National Accelerated Food for People's Programme (NAFPP)

was launched, the improved upland rice production system became a common feature of ~llu

Nigerian rice industry. Particularly with respect to group farmers of southern Nigeria.

Under improved upland rice productio~lsystem cultural practices are similar to tratlitio~~al

upland rice cultivation system except that improved seeds and fertilizers are used (FDA,

1978).

The upland rice cultivation is much the same as for other cereals in whicli all

operations involved in preparing the seed bed, plaming, weeding and varvesting are

performed when the soil ii relatively dry. Normally, natural rainfall is the only source of

moisture although in some areas a limited supplemental irrigation is used (FAO, 1966; Grist

and Lever, 1969). Its cultivation is limited to regions where in addition to satisfying the

plant's requirements regarding light and temperature, the rainfall is mt less than 750 lnln

distributed over a growing period of 3-4 months (Grist and Lever, 1969). The uplalld types
of rice will grwo well in areas with 30,'' to 50' (76cm to 127cm) of rainfall kr a n n u m
(KOmolafe a d.,1982)

Strictly, upland rice cultivation is practised on well-drained land not subjected to

flooding. It is a traditional system of rice production on which soil fertility is lnainui~~ed

by

bush fallow method. The land is cleared between December and March. With the onset of

rains in the early April, the land is slightly heaped and the seeds broadcast and harrowed

with a hoe. Hand-weeding is the usual practice and harvesting is manual. Because of better

soul and better rainfall, yields are slightly higher in the south than in the north (WARDA,

2.1.4 Irriated Rice Production System

This system of rice cultivation has become important within the last decade. By

1981,346, 543'hectares of land were devoted to rice production out of which only 8.5 X can

be claqsified as irrigated rice in Nigeria. The rest comprises ~uostlyrain-kd and swamp.

Fadama rice is widely cultivated throughout the country (WAKLIA, 1981).

In 1979, the following irrigated rice schemes were identified:

(a) South Chad Irrigation Scheme with a capacity of 8000 hectares;

(b) Sokoto Rima Basin Irrigation Scheme with a capacity of 4000 hectares:

(c) Edozhigi Irrigation Scheme with a capacity of 9000 hectares ;

(d) Badeggi Irrigation Scheme with a capacity of 580 hectares;

 (e) Shonga Irrigation Scheme with a capacity of 300 Ilectares;

(f) Loguma Irrigation Scheme with a capacity of 200 hectares;

Small irrigation schemes identified include the Dep, the Jere Bowl, the Uzo-Uwani, the

Kastina Ala, the Longkart and the Ngala (WARDA, 198 1).

The major rice varieties cultivated are improved varieties such as I R-20 (FAR( 19).

- FAR0 lS,l6,22,23 and 24. Fertilizer application and use of some chemicals are coniinon

and occasionally mechani7ation is used particularly ill lalid prepxxtion. The yiclcls obu~ilicd

are generally higher than in other systems (WARDA, 1981).

For irrigated rice, timely preparation of the land, raising of seedlings ar~d

transplanting are essential. Cultural practices vary a great deal under different systems of

rice culture. Among all the cultural practices for irrigated systems such as fertilizer

management, Weed control and insect control with insecticides are far more efficient than
. .

those of rain-fed systems (De Datta, 1981). Modern varieties with semi-dwarf growth

characteristics have done best in irrigated rice culture. The basic lR8 plant type with a

maturity of 100-125 days is most appropriate. In order to increase cropping intensity and

productivity per hectare per day, even shorter maturity varieties are desirable (De Datta,

1981).

2.1.5 Lowland Rice Culture

In most rice growing countries, rice is usually grown a. a lowland (wet land) crop.
 Yield is very variable depending on the courllry and variety (Any;illwu ct d..1982).

Yield is also determined by soil, climate and method of cultivation. Yield varies fro~n896-

I ,OORkg/ha for upland rice to 1,344 - 2,016 kglha for swamp rice (Ko~nolafe d.,1980).
+'
In most tropical countries, the yield is about 115kg per hectare. In eastern Nigeria, swamp

rice varieties with water 'mntrol and fertilizer application will yield up to 3.450 kg to 5.750

kg per hectare. Average swamp rice without fertilizer will yield between 1.150 to 2.30kg

per hectare. Upland rice without fertilizer yields at an average of 920kg to 1,725kg per

hmare (Anyanwu a d.,1982).

2.2.0 Financial Statements
. , .
For agricultural based firms and other fir~nsiw,;, i: !s :qonant to project iuld

analyse financial statements to judge efficiency, incentive, credit worthiness and liquidity

and to determine the costs and benefitc that are to be included in the overall project.

Whether such enterprises are private or public owned. there is the same need to analyse

-their financial structure (Arene, 1998).

Financial statement analysb consists of applying analytical tools and tecllniques LO

financial statements and other relevant data to obtain usel'ul inti)rniation o ~ ithe con~p;~riy's

past performance and current financial position. It may be usccl LO 111dupreclichns tliat

may have a direct effect on the decision made by users of ti~ialicialsutenients such ILS

t id., 1987). The financial

present and potential investors and creditors (Hermanson g

statement of a business is analysed to determine irs ovcrall l'inancial position pusitiur~; I I ~

certain aspects of that position such as earnings prospects and debt paying ability. In

tinancial statement, relationship between items and groups of items plus changes that have

occurred are significant and are required to be seen and therefore may be represetmd i n a

comparative statement as comparative balance sheet, income statement, funds statelnent,

and so on. In comparative statements, the items or amounts for two or more successive

years are placed side by side in columns on a single statement (Pyle d.,1980).
A company's financial statement is internally analvsed by the management I
 and externally by investors and creditors. Management analysis of financial statement

primarily relates to parts of the company. Management conducts financial statemenr a~lalysis

to plan, evaluate and control operations within the company. The analysis of investors and

creditors generally focuses on companies as a whole. Investors and creditors amlyse

tinancia1 statements to decide whether or ilot to invest or extelld credit to the colnpany

- (Hermanson g d.,1987).

Financial statement is prepared by business for three liliiiil groups: L11e ~ U S ~ I I ~ S S

managerslowners, potential investors and government. The managen need the ti na~icial

statements to calculate the value of business over a period of time to know if it is growing.

The owners also need financial statements to compare profit earlled in one year with

another year so as to plan business changes and expallsio~i.I t is also useful for tllciri to

determine if they should stop further production.Tlie investors relied on fin;mci;d CI:III~I~ICIII

to give them aqurate information on the financial position and protirs of the business.

Government officials carefully check financial statements to give them accurate informatioil

to make sure correct tax is paid. Also government pays out grants to ceiui~lbusiness to help

them get established in a product line that is conuolled by foruigr~busi~lcss.'l'llc I'i~mcial

statement of a business helps the government to determine the correct ainouilt of these

grants (Murphy g a!,!., 1978; Brigham, 1986).

Sometimes, outsiders are interested in predicting the company's solvency rather tllan
 its profitability. Short term solvency is affected by the liquidity of the company. Liquidity is

the state of possessing liquid assets such as cash and other assets that will soon be converted

into cash. Short term debts must be paid soon, so liquid assets must be available for

payment. Long term creditors are interested in a company's long term solvency. A

company is generally considered to be solvent when its assets exceed its liabilities so that it

- has positive stockholders' equity. The larger the assets are in relation to the liabilities, the

t d.,1987).
greater the long term solvency of the company (Hermanson g

There are two major methods that may be elnployed in the analysis of financial

.
statements. These are evaluation methocl which consists of an evaluation of fitia~lcialitems

on the financial statement of a busitless firm in all LZ,;i.: !:, :!erertnine their accuracy.
reasonableness and importance in business. and the ratio analysis (Rwd, 1963).

The fdur basic financial state~cnts,the balance sheet, the iiicorne statement, the

statement of changes in financial position or funds stakment and the statement of changes in

retained earnings taken together give an accounting picture of the firm's operations and

financial position. The financial statements revrt what ha$ actually happened to earnings

and dividends over the past few years while the verbal stlltenlenrs attempt to explain why

things turned out the way they did (Brigham, 1986)

2.2.1 The Balance Sheet

The balance sheet shows the financial position. of a business at a point in time

usually end of the, accounting period (Pyle 3 d.,1980; Murphy d., 1978). It is a

statement showing the accumulated assets - the wealth - of a company and how this wealth

is financed (Behrens and Hawranek, 1991). It contains the names and amount of three

different types of accounts, cIassed as assets, liabilities and owners' equity (Murphy et id.,

1978; Encylopedia Britannica,Inc., 1995.). It describes the resources that are under the

company's control on a specified date and indicates where these resources have come from.

The balance sheet in other words shows the company's resources from two points of view

and the following relationship must always exist. In balance sheet, total assets equals total .

liabilities plus total owners' equity. Also expressed in anotlier way, total assets niinus total

liabilities equals 'total owners' equity. The owners' equity in the company is always equal to

the net assets (assets less liabilitie.) ( Ewyclupetli:l Brita~~nicii.

I nc., I1N5).

.-. .. Assets
Assets are valuable rights owned by the company. They are ordinarily sub-divided

into current assets and fvted- assets. The former include cash, amcunts recoverable
I

from customers, inventories of products. raw materials, work-in-progress, markeuble

securities arid other assets which are normally converted to cash wilhin the year such as

production, sale and collection. Fixed and inter~necliatcassets may include I~I-currenr
 receivable fixed assets such as land and building, machi~lcryand ecluiprllent, furniture, uld

so on and long term investments (Reed, 1963). Inta~lgibleassels such as goodwill,

trademark, brands, copyright, patent, leaseholds, formulas, franchise are also in accord

with acceptable accounting theory (Reed, 1963).

2.2.2 Income Statements

- Income statement or statement of profit and loss account is a schedule that shows the

revenue and expenses of a business firm over a specific period of time and the profit or loss

resulting from such operations for the accounting period (Reed; 1963, Pyle et a!-., 19W. 11
is a statement summarising the firm's revenues a d expenses over an accou~\ti~lg
period

(Brigham, 1986; Gittinger, 1982) and gives a kind of cinematic picture of activities over

time (Gittinger, 1982). It is a record of the receipts and gains less expenses and losses

during the same period during a specific period usually a year with a net income or net loss

as a result (Murray, 1974).

It indicates the financial health of a business and provides some of the fcrs busiwss

owners need to help them. make wise business decision (Murphy g &, 1978). The

objectives of income statement include:

(a) ascertaining the amount and stability of the income and

(b) determining whether the income is bei~lg~nanagcciso that n\axi~nump o f i r ; h ! l i ~ y i.,

being attained (Reed, 1963). I1 is a measurement of input and output in terllls ol'
 value (Murray, 1947). The company's success is measured by the amount of profir

-
it earns that is, the growth or decline in its stock of assets from tlle sources otller

than distribution or withdrawals of funds by owners and creditors. Net income is the

accountants' term for the amount of profit that is reported for a particular time

period ( Encyclopedia Britannica,lnc., 1995). l~luo~ne

statement is a I; ind ol'

- statement used in determining the amount of income tax a farm should pay. And it

is the type of information needed in analysing the credit requirements of a farmer

(Murray, 1947).

There are several items in the inconie statement that a~ralys~s

evaluate carefully. A

relatively large amount of returns and allowances may be an indicatio~iof poor niallagemenr

since it represents merchandise returned or price adjustment given because merchandise was

unsatisfactory to 'the purchaser. If such conditions are not corrected, Ihe firm m y find it

difficult to hold old and to attract new customers. It would tllus become less profitable.

impairing debt paying ability. The method of valuing inventories is examined closely since

it will influence the cost of goods sold and hence profit. An over statement of beginni~lg

inventory, for instance, will result in over statement of cost and an understateme~ltot'

profits. An overstatement of closing inventory will have opposite influence. A change ill he

irlveiitory valuation may be made to increase profits and therefore impress the lender that.

the business firm has the ability to generate inco~neto repay a proposed loan (Reed, 1963)
 Close scrutiny is usually given to officials or officers' salaries since these may be

excessive and result in a drain on profits of the business to the extent that its ability to repay

an obligation will be impaired. Provision for doubtful accounts is necessary for such

receivable arising from sales made by the business which may not be colIectable or

collection may be slow (Reed, 1963).

- 2.2.3 Funds Statement

Funds statement or statement of changes in financial position of a business iden~it'ies

the major tlows of funds during the period (E~xyclopediaRritannica, Iiic., 1995). I [

sum~narisesthe changes that have occurred in the financial position of the business during

the period. "Funds" in business means economic resources that call be used to acquire

assets, pay dividends, reduce debt and finance similar transactions. (Ryle er d.,1980).

The pufpose of funds statement is to permit an examination of the co~iipariy's

financial activities during the period to identify existing rela~iousliip (Encyclopedia

Britannica; Inc., 1995). It provides information as to how the activities of the enterprisc

have been financed and how its financial resources have been used during the period

covered by the statement. The statement should portray all aspects of filialicial and investirig

activities during the period. It aids in u~iderstandingthe financial position of a business by

supplying answers to such questions as funds flow and use in business operation, uses of tlir

proceeds of the bond issued, why current assets are fewer and current liabilities higlier at
 the end of a period, than at the beginning. It provides information as regards such quest ions

by showing where the business got funds and how they are uscd. 11 is so~netimrsalso cnllccl

a statement of sources and applications of funds (Byle g

t 3.. , 1980).

Sources of funds include buying assets on credit from suppliers (accounts payable).

loans from banks, insurance companies,pension funds and other i~atitutions, money

- generated by selling assets, by collecting receivables, by drawing down the cash accounts,

from sales of preferred and common stock to investors, by saving money as retlected ill [he

retained earnings. They also include funds from operations, depreciation, credit sales as

well a5 money from friends, neighbours and relatives or family and so on (Briglla~n,1980;

Paulus, a,1974).
Uses of funds may be for internal inbestrnent to maintain present level of activity or

to finance exparkion, to repay debt or principal itwrest. for busilws CXIYIISCS 01. lilxes, lilr

acquiring fixed assets, building up receivables or inventories, for external investment of the

earning as they are given to the current owners as dividends (Fleischer, 1969; Brigh;m,

1986).

2.2.4 Statement of Changes in Retained Earning

The statement of changes in retained earnings re'fers to a period of time rather that)

to a single date, and explains the change in retained earnings from one balance sheet date to

another. The retained earnings statement is the link between the income statement and the
 balance sheet. This relationship can be demonstrated by rewriting the accounting equatio~~
ir~

the following way: assets minus liabilities equals paid-in capital plus retained earnings.

When the company reports net income, this means that die net assets (total assets 111inus

liabilities) increased. Therefore if the accounting equatio~lis to rcmnin bal;tnced, :in a ~ i i c x ~ ~ i r

equal to net incoine must be added to retained earnings (Encyclopedia Britannica, Inc..

1995). Retained earnings is that part of stockholders' equity resulting from earriings, it
-
represents the source of certain assets received but not distributed to the stockholders as

dividends (Hermanson gj d.,1987).

Statement of changes in retained earnings summarizes the changes in the firm's

retained earnings (Pyle g d.,1980). It is a statement reporting that portions of the firnls

earnings not paid out as dividends. Note that the balance sheet's retained earnings represents

a claim against qsets, not assets per se. Retained earnings as reported in the balance sheet

do not represent cash and are not available for payment of dividend or anything else. The

amount recorded in the retained earnings in .the accounting process is not an indication ot

cash the fum has. That amount (as of the balance sheet date) is found in the cash accoulit -

an asset account. A positive number in the retailled account indicates ~llatonly ill the past,

according to generally accepted accounting principles, the firm has earned an income and its

dividend has been less than that reported income. Even though a company reports record

earnings and shows an increase in the retained earnings account, it may still be short ut'
 cash. This is because firms retain earnings primarily to expand the business. This nie:irw

investing in plant and equipment, in inventories and so on, not in a bank account (Brigllil~~l,

1986).

2.3.0 Financial Ratio Analysis

- A ratio is used in financial analysis as an index for evaluating the financial positio~i

and performance of an industry. The absolute accounting figure reported in the financial

statement (balance sheet and profit and loss account or income statement) do not provide a

meaningful understanding of the performance and financial position of a firm. A n

accounting figure conveys meaning when it is related to some other relevant inforrna[ion. A

ratio indicates a quantitative relationship which can in turn be used to make u quali~a[ive

judgment and su'ch is the nature of all financial ratios (Arene, 1998).

The term "accounting ratio" is used to describe signiticant relationship which exisr

between figures shown on the balance sheet, in a profit and loss account, in budgetary

control system or in any other part of accounting organisation (Batty, 1995).

The use of ratios in financial statement analysis. assumes that the financial srrcngrh,

liquidity and operating efficiency of a business can be derived from the study of selectctl

ratios (Reed, 1963). Ratios may not be automatically regarded as good or bad but have to

be evaluated in the light of the characteristics of the corresponding industry. the type and
 scope of the project and the country of investment (Behrens and Hawranek, 1991). The
ratio analysis involves the comparison of items in t l x financial statement that have bearing

on the financial soundness and strength of the business firm and the expression of these
/

comparisons in terms of percentages or ratios. It also involves the comparison of the ratios

of a business firm with the other like firm (Reed, 1963).

. Generally, single ratios are of limited value. This is so because trends ratios are of

great importance. In addition, a change in one ratio may be of significance only when

viewed in relation to other ratios. When a~lalysingfinancial results, the remark on

ascertaining the trend by studying a nillnber of y ~ u s result

' is extremely important. A

period of five years may be quite adequate for assessing the trend from the past to the

present and for estimating the future. If fewer years' figures are available then the yt use

has to be made of these (Batty, 1975).

When faced with .a problem, it is very important when compiling ratios that these
are selected with great care. There is nothi fig to gain by producing every posible ratio. Too
many ratios may confuse (Batty, 1975). a few could be highlighled.
In view of the requirements of the various users of ratios (the creditors, owners,

management), they may be classified into the following four categories: liquidity ratios,

apical strucnire ratio or equity or long term solve~lcyratios, profirability ratios and activity

ratios or market tests (Arene, 1998; Hernlanson g &. 1987). /

. .
 However, for the purpose of this ptudy, the following ratios will be treated: liquid iry
'
ratios, capital structure ratios and profitability ratios.

2.3.1 Liquidity ratios

They are made up of current ratio and quick ratio.

Current Ratio

- The current ratio is a liquidity measure mmputcd by dividin?, crlrrcnt assers !1y

current liabilities. It measures the short term solvency and is a very high indicator ol' rhc

ability of a firm or company to meet current liabilities (Behrens and Hawranek, IW!;

Hermanson a a., 1987). A high current ratio indicates a large proporrion ut' currcnr iLSsci\

to current liabilities. The higher the ratio, the more liquid the co~npa~ly's
curl-enr posilio~l

and normally the better it can meet its current obligations. Whether a compa~ls'sc.arrilnr

ratio is good or Gad depends upon at least three factors: the nature of the cu~ll,)ii~ly'h

business, the composition of current assets and the turnover of some of its currenr awls

(Pyle g d.,1980). The current ratio shows the strength of the company's working capiral,

which is the excess of current'assets over current liabilities (Hermanson aJ., 1980).

Quick Ratio

This is computed by dividing cash plus marketable securities and discounted recei

vables by current liabilities. The ratio thus eliminates the inventory and prepaid expenses

from current assets (Behrens and Hawranek, 1991).

 2.3.2 Capital Structure Ratio

Capital structure ratio also called equity or long term solvency ratios, sliows

proportion of debt to ecluily in finnnrin;! r!ic f i r . 1 1 1 ' ~:~sst~!u.11 cu~isisrsot'tlcbt - qui!v ratio.

debt to total capital ratio and coverage ratio (Arelie, 1998).

Ikbt to Total Assets (Capital) Ratio

- This is a variation of the debt-equity ratio and .gives similar indication as the debt-

equity ratio. It shows the percentage of the firm's assets financed by credi~orsand the

proportion financed by shareholders (Arene, 1998). It is the ratio of total debt to total nsscls

and measures the percentage of total funds provided by creditors (Brigham, 1986).

Deht to Equity and Deht to Total Assets

They are simply transformations of each other.

where D = Debt

E = Equity,

A = Asset

Both ratios increase as a firm of a given size (total assets) uses greater propur~ior)01'

debt, but DIA rises linearly and approaches a limit of 100% while DIE rises exponenrially

and approaches infinity (Br igham, 1986).

 For certain purposes the debt ratio should be based on the market values of the

firm's assets and debt (outstanding bonds). Market values are especially important it' hey

differ from the accounting values shown in the balance sheet (Brigham, 1986).

Interest Coverage Ratio

Interest coverage ratio, also called time interest earned (TIE) ratio, is used to test ~ l w

- firm's debt servicing capacity. It is the sum of net profit before interest and taxes divided by

interest charges. It shows how many times the interest charges are covered by funds thar are

ordinarily available to pay interest charges. A high ratio is desirable because it inclicatcs the

extent to which the earnings may fall or decline to be able to meet its annual interest cli;irp,cs

to avoid causing any embarrassment to the firm regarding payment of interest cllar-ges

(Arene, 1998; Brigham, 1986). Failure to meet this obligation can bring legal action by rile

creditors possibl; resulting in bankruptcy (Rrigham. 1986).

2.3.3 Y~.ofitabdityRatios

This is calculated to measure the operating efficiency of thc firm (Arenc, l L M ) .

Profitability is the net resuit of a large number of policies and decisions. The profitabiliry

ratios show the combined effects of liquidity, asset management and debt management o n

operating results (Brigham, 1986). They are computed on the basis of sales or invest mcnrs

and are of special interest to management, stockholders, u~iioriofficials and employees m d

creditors (Solomon d.,1983).

 Generally two major types of profitability ratios are calculated: profitability i I\

relation to sales and profitability in relation to investment (Arene, 1988).

The Gross pt.Ofif M q i n (GPM) Ratio

This is the first profitability ratio in relation to sales. It is calculated by dividing [he

gross profit by sales, that is, sales less cost of goods sold divided by sales. This ratio

- indicates the average spread between the cost of goods sold and the sales revenue. A Iiigh

gross profit margin relative to the industry average implies that the firm is able LO produce

at a relatively lower cost (Arene, 1998).

Gmss h f J as a Percentage of Sales

This represent$ the amount of gross profit pered 100 of sales. The ratjo is ~scclxs n

test of the profitability of the sales. Just because the sales increased does not of irselt'

indicate that the gross profit will increase (Omuya, 1982).

If there is a fall in gross profit, there can be many reasons. Perhaps the goods 11ei1lg

sold have cost more but the selling price has not risen lo thc same extent. May be ill order

to boost sales, reduction have been made in the selling price of goods. 'There could l ~ cii

difference in the composition of types of goods sold, caiicu rhe saiuh 111i:i !)C'IW~:CII [hi, YC;II,

and last, with different product lines carrying different rates of gross profit pcrN I00 of

sales. Alternatively there may have been i greater wastage or pilferage of goods. These are

only some of the possible reasons for the decrease. T I I idea

~ of calculating the ratio is lo
highlight the fact that the profitability perkf 100 of sales Ilas changed, arld so promote an

enquiry as to way and how such a change is taking place (Omuya, 1982).

Net Profi Margin (NPM) Ratio

This is measured by dividing net profit after tax by sales (Brigham, 1986: Arenc,

1998). The ratio establishes a relationship between net protlt and sales and indica~es

management's efficiency. It is the overall measure of the firm's ability to turn each naira of

sales into net profit. If the net margin is inadequate, the firm will fail to achieve satisl'actory

returns on owners' equity (Arcne, 1998). Significant decreases in this ratio fro111 year ro

year necessitates investigation (Solo~nongt ill., 1983).

Operating Ratio

This is also called rate of return on assets or investment as well as return on total

assets employed or return on asset investment or investment (Arene, 1998: Pyle y ;I!..

It is an important ratio that explains the clia~igesin [lie ncr prol'it 11i:~rgitiI - X I O

(Arene, 1998). It is a measure of managements performance. Assets are used to earn pt-ot'i~

and nlanagement is responsible for the way in which they are used (Pyle d.,1980). 11 is

computed by dividing all operating expenses, cost of goods sold, sell irg exptwses :111tl
general and administrative expenses by sales (Arene, 1998) or by dividing the net iuco~ne

1980); Soloniorl ct d.,

t d.,
plus interest expenses by average total assets employed. (Pyle g

1983). A higher ratio is unfavourable since it will leave a small amount of operating i ~ r o m e

to meet interest, income tax, dividends, retained earnings, and so on (Arene, 1998).

Return on Shareholders' Equity Ratio

This measures profits generated on funds provided by common stockholilm

(Solomon g d., 1983). It is calculated by dividing net incoinc after taxes by average

stockholders' equity (Py!e _tl.,1980) or by dividing net income less preferred clivicle~itls
by the average common stockholders' equity. By subtracting preferred dividends, we derive

the income belonging to the common stockholders, the true residual owners of a corporar ion

(Solomon d.,1983).
2.4.0 Capital Structure

operate. The tirm must raise capital which comes ill two basic for~ns:debt i ~ l i t l ccluir y

Capital structure is the proportion of equity to debts (Paulus, Ed, 1974). The long term

claims are said to form the capital structure of the eqterprise. The icrm capital is used 11)

represent the proportionate relationship between the various long term forms of ti~la~ici~ig

such as debentures, long term debts, preference capital and common share capital inclutl i rig

reserves and surplus viz retained earnings (Pandey, 1981). Capital structure, also called
leverage or gearing ratio of a firm, is the ratio of its capik raised by fixed interest securities

such as debentures and preference stock to equity or ordinary share capital (Paulus, kt,

1974; Brigham, 1986).

Each firm has its own capital structure. which is a mixture of debt, preferred stock

and common equity that causes its stock price to be maximised (Brigham, 1986). The

alation of ordinary shares (equity capital) to preference share capital and lo;^ capital is

described as capital gearing (Batty, 1975). The optimal (leverage) capital structure of a l'irm

is that mix of equity and debt which ~naxi~nizes

the total market value of the firm. I t is tlie

ratio of debt to total value of the firm at market prices (Fleischer, 1969). Oprilnal

(leverage) capital structure is also the point at which average cost of capital is equal to lit.

marginal cost of capital, whereas the rtwginal cost ot capi~alis a total 01' tllc

inreres~charges brohght about by h e iricrcasecl debt all11. 1.1 .

lL ~lt\r;.i;;F;C ill cn~.~ii~y,~

maintain the equity value of share holders (Fleischer, 1969).

If a fum has a high ratio of fixed .interest securities to ordinary shares then, it is said

to be highly geared while with.a low proportion of fixed interest stock to equity capital, i t is

said to be in low gear (Batty, 1975; Paulus, a,1974; Ord and Livingstone, 1969). A firm
with the same proportion of fixed interest stock to ordinary share capital is oftel! in 1!1c

process of moving from high to low gear or vice versa and can be ret'crred to :ls : I Ic~v e n l y

geared company (Paulus, a,1974).

2.4.1 Owners1Equity Capital

There are different types of equity - the equity of a proprietorship also called

proprietor's interest or proprietor's network. For partnership the word partnership is

inserted in lieu of the proprietor. For a corporation equity is represented by preferred stock

and common stock holders' or owners' equity (Brigham, 1986).

Owner's equity is the ,amount the owners have invested in the business. 111 a sense,

the business owes the amount shown under rhtr owner's equity to the owners. The tlit'lk~w~~c

between the assets and the creditor's claim on the assets. the liabilities, represcllrs r l i ~ ~

owner's interest in the business (Smith a d.,1983). Owner's equity represel1t.s [lie nc~rworrli

or interest of the owners in the assets of a business. It is equal to the company's assets, r liar

is, assets minus liabilities. Increase in owners' equity results from issuance of preferred

stock or commori stock for cash, investment of current assets made by proprietors a d

partners and net income (Solomon, a d.,1981).

Owners' equity capital are also those funds provided by the owners of tirm in the

form of profit realised from' prior operations and retained for reinvestment or from irifusio~l

of new capital raised from new owners tlirough the sale of additional shares of colnrnon

stock (external equity) (Fleischer, 1969). Thus, comulon stockholders equity may be ttirecj:

capital stock, paid-in capital and retained earnings (Dittrich g

t &,1977).

Forms of paid in capital may be premium on stock, increase from reissue o i

 treasury shares, donated capital and discount on stock (a negative form of paid-in capitill).

redemption premium on stock, revaluation capital sometimes called appraisal capital

(Dittrich g d.,1977). The new equity capital can be raised in a variety of ways other than

the distribution of issues on the open market. For instance, existing owners may exercise

pre-emptive rights to purchae additional shares, or other issue of securities may be

w

converted to common stock (Fleischer, 1969).

Common equity capital provides the main risk bearing capital of the business atitl it'

receives a$ its reward the surplus protit remaining after prior charges to the holders ol'

debenture and preference shares have bee11nict. From ~llcco~npany'spoinr ol' view, ir is [he

ordinary shares or owners equity that form h t : base of capital structure. Ladl issi~clri' sli;~t.~h\

has a nominal value or par value which does not change. When sold initially in the ~iiarkct,

the company obtain5 it5 capital and they may be sold at a discount or pre~niulnbut the value

they are sold at is the money the company receives (less expenses) (Paulus, Ed, 1974):

Besides ordinary voting and non-voting shares, there is another type of ordinary
,
shares called deferred or founders' shares. The nominal value is l ~ ~ l l i l l ls~iiall
y ;IIKI tlw

holders are entitled to surplus profits after ordinary sllareliolders havc received their wu!

dividends. Ordinary shares and profits to them which are placed in reserves is usually die
major contribution to a company's capital structure (Paulus, -a,
1974).

Founders' shares art: the shares which have bccn issued to the foundcrs of [lie

entitled to all the profits after a certain percentage has been paid on the other class of s1i:tr-eq.

The holders have different rights to dividends than other shareholders. They are not very

,.common in public companies (Anderson, 1977).

The ordinary shareholders have no actual right to a dividend but are elititled to ill1

benefits after prior dividends of the preference shareholders (.4nderson, 1977).

The cost of equity capital (Ke) is given as the ratio of expected fu[ure 11ct c;tr~li~ig,s

after interest and corporate taxes (E) to the market value of the ownership sllares (M!

(Fleischer, 1969).

2.4.2 Preference Shares1Preferred Stock

This is a hybrid security that represents a cross between debt and equity. It is sinlihr

to bonds in some respect and to common stock in others. The hybrid nature ot' prel'crr-ccl

stock becomes apparent when we try to classify it in relation to bonds and common xrocl,

(Brigham, 1986).

Like bonds, preferred stock has a par value. Preferred dividends are also similar to

interest payments on bonds in that they are fixed in amount and generally must be paid

before common stock dividends can be paid. Preferred stock is sometimes treated as debt
and sometimes as equity depending on the type of analysis made. If the analysis is being

made by common stockholder, considering the fvred charges which must be paid ahead ol'

common stock dividends, then the preferred stock will be viewed much like debt wliilc

creditors viewed it as equity. accountant^ generally include preferred stock in the equity

portion of the capital structure calling it "preferred equity " as opposed to

. .co~ii~~lon
equity". Still from all economic ~ra!?d;wint,preltrred is as much like dcbr ;IS collllnori

equity (Brigham, 1986).

Preferred stock has certain preference rights in receiving dividends andlor iri

receiving assets in the event of liquidation of the corporation (So!omon e_t d., 1987).
Regarding dividend , preferred stock may be cumulative or non - cumulative: it ~mtybe

t &. , I 987; Anderson, 1 977; Paul us, Ed,

participating or non-participation (Sololnon g

194).Preferred stock may be redeemable or irredeemable (Paulus, 1974).

2.4.3 Debt Capital

in the form of IU:IIIS

This consist of funds provided by individuals and instit~~tiotis

which must be repaid according to some contractual agreement (Fleisclier, 1969): Prior ro

lending money to a business entity, creditors will study thc rc13tionsliip herweell llic

resources provided' by other creditors and the resources provided by owners. Generally tl~r

greater the amount of resources provided by creditors compared to that provided by vwllcrs.
 the greater the risk to be taken by any new creditors lending additional funds (Smith et d.,
1983).

Creditors lend funds to the firm at rates that are based on

(a) the riskiness of the firm's existing assets,

(b) expectations concerning the riskiness of future asset additions,

- (c) the firm's existing capital structure, that is the amount of debt financing its issues,

and

(d) expectations concerning the future capital structure changes.

These are the four factors that determine the riskiness of the firm's cx$h tlows a11d

I~enct:the safety of the debt issues. The credirorq rhercforc sct rlirir recluirwl rate\ ot' rc'~[rl-11

and hence the cost of debt to the firm on expectations regarding these factors (Br~glla~il,

1986).

There are many different types of debt - long term, medium term and short. term

debt, interest bearing and non-interest bearing, secured and unsecured debt and so on. There
.
are also many different types of long term debt instruments: term loans, bonds, secured anti

insecured notes, marketable and non -marketable notes,etc (Rriglm~,1986).

Companies obtain the bulk of the funds used to buy assets:

I. by buying on credit from their suppliers (accounts payable)

 2. by borrowing from banks, pension funds and other institutions

3. from the sales of preferred and common stock to investors and

4. by "saving money" as reflected in the retained earnings account.

Also since wages and taxes are not paid on a daily basis, companies obtain some 'credit'

from the labour force and the government in the form of accrued wages and [axes

w
(Brigham, 1986).

Bonds are the most common types of debt capital. Both bonds and preferred stock

are referred to as senior securities in that holders of them have claim to the assets of the

tirm ahead of owners of common of stock (Fleischer, 1969). A bond is a long term 1 iabil ir y

that derives its value from the promises made to the purchaser, viz

1 . the issuing company will repay the principal at a-specified later time and

2. the issuing .company will make periodic interest payments until that time.

Bonds may be securedlmortgaged or unsecured, registered or unregistered (bearer), term or

social and callable or non-callable. Two other features of bonds are convertibility to capital

stock or detachable stock warrants (Solomon g d.,1987). -

The total cost of an increment of debt capital may b e defined as the d ircct '' price' '

paid for borrowed funds in addition to effect of new borrowing on cost of other capiri~l.

Unlike equity capital, the cost of debt need not be inferred by market valuation. 011 he

contrary, the direct price paid for debt capital is explicitly stated at the time of the loall ill. '
 the form of contractual conditions regarding the amount and timing of repaymrll[ of

principal and interest (Fleischer, 1969). The direct cost of capital is given as the ratio of

annual interest charges to market value to debt (Fleischer, 1969).

2.4.4 Capital Structure Decision

A company will have to plan its capital structure initially at the time of protnotion

.. and subsequently whenever funds have to be raised to finance i~~vestments

in a wpil;\l

structure, decision is involved. A demand for raising funds generates a llew capital structure

since a decision has to be made as to the quantity and forms of financing. The decision

involves the analysis of the existing capital structure and the factors which will govern the

dexision at present (Pandey, !981).

Capital structure policy involves a trade off between risk and return (Pandey. 198 I ;

Brigham, 1986). .A rational value maximizing firm will establish its capital structure and

then raise new capital in a manner that will keep the a c t d structure on target over rinir.

The optimal capital structure strikes the balance between risk a d return which maximizes

the price of the stock and simultaneously mi~li~nizes

the overall cosr ol' capikl. 0 1 l c . c ;:

company's operating leverage has bem established, the dcgree of the leverage intlucnces the

firm's capital structure decisions (Brigham, 1986).

If a firm raises new capital to finance asset expansion and if it is to keep its capital
,
structure in balance, that is, if it is to keep the same percentage of debt, preferred stock iwd
common equity funds,then it will raise part of its new funds as debt, part as preferred stock

and part from retained earning or from issuance of new stock (Brigham, 1986).

The general rule on the maximum amount of capital to be employed by a business is

a difficult task. Each business has different characteristics and what is good for one may be

quite different for another. The value of fixed asset can be used as a guide to determining

-what is a reasonable amount to borrow. To ensure that a sound policy is being followed, the

total amount borrowed should not exceed a reasonable proportion of the fixed a s e l l'igurc.

Between'one third to one- half may be taken as an approximate guide. This then leaves a

margin for safety and allows for any emergency borrowing that may be found necessary.

Clearly, the larger the proportion of debentures to fixed assets, the greater may be the

danger of losing control to creditors. It is advisable to have a very large proportiori 01'

ordinary shares (sitty,1975; Solomon d.,1983).

The role of management in selecting the gearing for its company is two fold:

(a) it must attempt to secure a maximum return for its equity shareholders and (b) at the
.-
same time ensure that the gtiaring of the company is attractive enough to encourage loan

stock investors without putting the existence of the company in danger by committing itsel t'

to heavy futed capital charges which n~ightbe inipossiblc to meet when profits ;\re

depressed (~au'lus,.B,1974).

Using more debt raises the riskiness of dlt: firms earning strlatn b u ~it ; h o gcric~~al
ly
 means a higher expected rate of return. Higher risk tend to lower the stock's price but a

higher expected rate of return raises it (Brigham, 1986).

Capital structure ratio is of interest to both the creditors and stockholders. From the

point of view of a creditor, a high proportion of stockholder's equity is desirable. I t

indicates the existence of a large protective buffer for creditors in the event the company

suffers a loss. But from the owner's point of view, a high proportion of stockholder's rquiry
w

mayor may not be desirable. If borrowed funds can be used by the busirless to generate

income in excess of the net after tax cost of interest on such borrowed funds, a lowcr

percentage of the stockholder's equity may be desirable. (Hermanson a al., 1987).

Stockholders often desire a high debt to total assets ratio or equity. The presence of deb[ in

the capital structure can raise to positive leverage alld benefit the co~iimo~i
s~uckl~oltlers.

Increased debt generally increase leverage (Solomon d., 1983). Favourable leveragc

exists when the company us& assets provided by creditors to earn a higher retun) thr

common stockholders. Leverage is an attempt to use funds provided by non-owners 10

increase the return to owners (Smith g a!., 1983).

.
Leverage may also work to the detriment of the common stockholders if tile return

011 the borrowed and preferred stock is not sufficient to pay interest and preferred stock

dividends on that capital; some of the earnings that would normally be available to he

common stockholders are absorbed in making up the difference (Smith a 4.. 1983).

Low gearing occurs when the equity share capital dominates the capital structure
 and where there is little dependence upon debentures and other fixed irlterest stock. T l w e is

less interest debt burden to be faced and hence the company can now more w i l y weahcr

rough times. The ordinary shareholders have a better chance of dividends even in titiles of

skin profits since the prior charges on the way of interest payment to preference and

clebenture holders will be low (Paulus, Ed: 1974). The capital gearing adopted will

- obviously affect the future prospects of obtaining finance. If the capital structure gearing is

very high, then further loans or preference share capital may be out of the question. On the

other hand, an issue of ordinary shares may be an attractive position to investors. tlowever,

care should be taken to ensure that an issue of ordinary shares will no^ wealien coll~rul.A

right issue will overcome the problem. Alternatively, preference shares or loan ci~pi~n?
I M ~

be feasible provided a conversion option is given in term of issue (Batty, 1975).

Several bther factors influence capital structure ,decisions. Firms whose sales art.

relatively stable can safely take in more debt and incur higher tixed charges tliall ones with

unstable sales (Brigham, 1986). Firms with stable sales can employ higher degree of

leverage as they will not face difficulty in meeting up their fixed commitmew The
-
company with declining sales should not employ debt or preference share capital in the

' capital structure as they would find difficulty in meeting their fixed obligations. Non-

payment of fixed charges can force a company into liquidatioii (Pandey, 1981). Because of

their stable earnings utility companies may have as much as 70 percent of their tinanciill
structure in debt while industrial companies rarely have IIIU,L: L!;L:: 50 pvrct3nt dcbr I'~I~;LIIC~II~

(Dituich a d.,1977).

On growth basis, all things being equal, growing firms must rely heavily on exler~lal

capital. Furthermore, floatation costs involved in selling common stocks exceed those

incurred when selling debts. Thus,rapidly growing firms tend to use somewhat more tleh

than slower growing companies (Brigham, 1986). Consequently, the greater the expecrat ion

of growth the greater the amount of external financing 11eeded.The cheapcst and INL)SI

advantageous source of external financing is debt. The growth firms ~lierulimus LKI l l y

employ a high degree of leverage (Pandey, 198 1).

Firms whose assets are suitable as securities for loans tend to use debts rather

heavily. Other things being the same, firms with less operating leverage is better able ro

.
employ financial leverage because the interaction of operating and financial Icvcrapc

determine the overall impact of a decline in sales on operatil~gincome i i ~ l t l ner cad\ ~'io\t,s

(Brigham, 1986).

Taxes also affect capital structure and the higher the tir~n'scorporate tax m e , (lie

greater the advantage of using debt since interest is a deductible expense (Brigham, 1986).

The effects that debt or stock might have on management's control positiori I I U ~

influence its capital structure decision. If management is voting (over 50 percent of the

stock) but is not in a position to buy any more stock it may choose debt for any new
 financing. Otherwise a management group that is not concerned about wring control m y

decide to use equity instead of debt (Rrigham, 1986).

Many economists and security market professionals contend that corporation ca 11

increase the value of their shares by employing all optimal amount of debt in their capi~al

structure. This contention is based on the fact that cast of debt (discount rate on bonds) is

- lower than the cost of equity (discount rate on stock) and that rhe prudent use or Ievc~agc

does not increase the firm's financial risk and hence equity cost. Proponents of this view

argue that both equity and debt cost start increasing only after an excessive amount of debt

is introduced into one firm (Tinic and West, 1979).

Also, as increasing amount of debts are introduced into a t'irm's capital structure,

the expected default losses faced by its creditors and owners increase. This being the case, a

firm can only issue more debt only at steeply increasing yields (Tinic and West.

1979).

Fisher's findings on risk premium indicate that a one percent increase in the debt

equity ratio of a firm is associated with an increase in debt interest cost of about 0.2 pcrccnt

(Fisher, 1959). Moreover, increased expected default losses have indirect costs. As tlic
'
probability of financing exigency increases, lenders may impose restraillts o n new
I
investments as well as on operating and financing decisions of the tirm. Conseque~itly.

tirms cannot substitute debalor equity without limit (Tinic and West, 1979). ,
 Even with taxes taken into account, the virtue of an "optimal" capital structure.

that is, a specific mix of debt and equity capital that maximizes the ~narketvalue of the ,
I

firm, remains somewhat suspect. Unless it can be shown that some firms call issue

securities that lack good substitutes or that wst of issuing securities on personal account is

substantially greater than the cost for corporation, the value of corporation should not be

., materially affected by its financing decision over a very long range of debt - equity mixes.

only if furns exceed their so-called debt equity capacity will their values be affected by

their financing mixes. Then of course, the value of the corporation will decline wit11 further

debt tinancing (Tinic and West, 1W9).

2.5.0 Investment

investment may be defined as the sacrifice of current consunlption possibilities ill

the hope of realisihg increased consumption possibilities in the future. It is a flow variable -

the rate of addition to the stock of waith, capital, wllich has been accumulated IXISI
ill I ~ C

with this hope of increasing future consumptior: possibilities. Investment may be mcitwretl
-
in net or gross terms. Gross investment is the sum of the additions ro the capital stock while .

net investment is the sum of these additions minus any reduction in the existing stock of

capital (Lund, 1971).

Grorq private investment includes all private expenditures fur output to ~aainwioor

increase the nation's supply of capital. It is composed of two broad .categories - g m s

 private domestic investment and net foreign. investment. Gross don~eslici~lvest~iieiit
illdudes

all expenditure of individuals and business firms for current output with which to rnairltain

and increase the domestic stock of capital. It includes expenditures for replacement as well

as for net additions to the total stock. It is made up of three parts:

(a) producers durable equipment such as machinery, -fixtures,railing stock, and so on:

" (b) riew construction both residential and non-residential ; and

(c) net changes in the size of business inventories (Bauniol and Chandler, 1954).

lnvestment may be undertaken by individuals, goverlutient or firms. I t may also

take any forms; five separate classes of investment are identified below: ill Iiurllari

potentials, in tangible assets, in financial assets, in stocks and work-iii-progress arid in fixed

assets (Lund, 1971).

2.5.1 Investment Decisions

lnvestment as a financial term refers to the buying of stock exchange or goverment

securities, deposits of money in the bank with the aim of securing an income or the rcftlncl
'-
of a greater sum at some future date (Nwosu, 1994). There are many kinds of decisions to

invest: the decision to enter an industry i n the first pliicc, to expand an existing plm, to

replace old ma~hinery by new or w inuduce a more capitid in~tmivr ~iirtl~otl01

production. In all there is in each case a net expenditure on a durable producer goocl which

contributes to output over a period of time (Ord and Livir~gstone, 1969; Ord and
 Livingstone, 1980; Brigham, 1986).

The factors which will determine whether or not decision to invest is take11are as

follows: the cost of investible funds, as represented by the rate of interest, the level of

expected proceeds over the life time of the investment as represented by the size of' the net

proceeds, the distribution of the proceeds over time, that is, how soon the investnlcnt brillgs

in profits (Ord and Livingstone, 1969; Ord and Livingstone, 1980; Ackley, 1961) as well

as technology, government policies and expectations concerning the economy (Amos,

'.
Firms will carry out investment projec~c,or additiorlal investlnenw as long :LS ~kir

rate of return (R) exceeds the market rate of interest' (Gregory and Ruffin, 1988). 'I'he

minimum attractive rate of return required of all new investments proposals is determined

by the overall cbst of funds to be employed since these. investment funds are provided by

both equity and debt sources. The overall cost of capital is the average cost of equity and

debt weighted by the relative amount of each in the capital structure (Fleischer, 1969). 1'11~s
*
if business anticipates that'the revenue from the sale of goods and services producecl wid1

the aid of capital goods will cover all costs of production so that there is profit, it will irwcsr

i11 the capital goods. Otherwise, it won't. The expectation of profit is what determines the

level of desired investment expectations. Investment schedules can also be shifted due to '

several important determinants of profit yrospccts which also include besides tht: ones
above, the development of new products, the need for replaceinent and tile amount of

existing capital (Waud, 1983).

The volume of investment a business firm will consider it appropriate to undertake

at any time will be determined by the net income expected from the collection of investment

opportunities it has with the cost of available funds. ' ~ e n e r a l l ~the

, firm will rank i ~ s

investment by priority and cut off some of the lower priority ones. If circumstances should

cliange so that investments with lower prospective net incomes can be considered, some

additional investments will be undertaken (Bailey, 1962). The approach used to evaluate

investment alternatives is also influenced by whether a single project or two or more

mutually exclusive projects or two or more independent projects are being considered. For

single proposals, tlie analysis must lead to a correct rejecttaccept decisions. For nlultiplc:

alternatives, where acceptance of one project automatically rules out the acceptance of al l

others in the group, the analysis must lead to a correct ranking of the projects. For insmce, .

if a farmer who decides to create a new silo must rank the alternatives of upright silo versus

a bunker silo; when one alternative is undertaken, the orher is auto~iiaticallyexcluded..fro111

further consideration (Murray et al.. 1980).

A firm facing a single investment opportunity can decide whether to accepl or rejccl

the investment by making simple present value calculatio~i.Tlic firm may have to choose

between cheap equipment with relatively short service life or sharply rising maintenance
5
I
I
costs and between equipment that is more expensive but durable. To choose betweel; t l v m
the firm needs to compute the difference in the present value of the two options (Mayer :t

A,,1981).
It is important to emphasize that changes in project expectations are a more

important influence on the level of investment and that their omission can never be wllolly

legitimate (Baumol and Chandler, 1954). If the future is expected to be utlfavourablt..,

business managers will reduce all forms of investment. If the fulurt: looks briplll.

investments will increase (Starr, 1988).

If the amount required is known in the planning of capital, the firm must decide or)

how much capital will be invested in permanent and long term assets (fixed assets such as

land, building, plant and machinery) and how much on fixed assets which are lnovable a~icl

mobile such as furniture and motor vehicles. Capital will also be required for short term

assets such as raw materials, work in progress and stock of finished goods (currelit assets)
,
and for expenditures which are directly related to the productioh line suck as wages (prime

cost) and those that are indirectly related such as wages of store keepers and claners, rem.

rates and insurance (overhead costs).(Paulus, Ed, 1974). I.

The nature of business will determine the amount of fixed assets relative to current

assets and expenses. The establishment of how the capital will be used will determiw with a

fair degree of accuracy the time element associated with the various types of assets. The I

time will normally indicate the method which can be used to obtain capital and sources '
which cater for these methods. The general rule is that rnorley which gws illto I O I ~~ 1 1

and permanent fvted assets should come from longterm and permanent methods arid sources

of capital. Money to carry out the day to diiy operatiorls of the firm sllc)ultl co~iicfro111sllorr

term methods and sources of capital. Some assets which are neither long nor short such as

movable and mobile assets should be considered under those methods and sources wliich are

classitied as being medium-term (Paulus, a,1974).

How much to invest will also be affected by the extent of optirnism about future

sales volume and by price of plants and equipment required for expansion (Lovell, 1975).
3.0 METHODOLOGY
3.1 Study Area

The study area was Adarice Production Project (Nigeria) Limited. It is located on a

parcel of land used by former Uzo-Uwani Farm Settlement Scheme in Uzo-Uwani L t m l

Government Area of Enugu State. It is bounded in the East by U kpaki, West by A h n i a~vl

North by Opanda/Nimbo, all in Uzo-Uwani Local Government Area ol: Enugu State and ill

rile South by Omasi in Ayarnelum Local Government Area of Anambra State.

Its vegetation is predominantly grassland with sparsely distributed wild treeslsl~rubs

and slightly thick forest around the riverbanks. The soil is preclomina~itlyswampy clay, cliiy

or clay-loam and is very fertile and good for arable cropping. Its topography is fairly ~ h n c

land and the cash crops around the area were cleared a't the time of developrile~llcc) givc

way for rice production and settlement.

-
It is lying side by side with Enugu State Rice Project as an adjacent agricultural-

based establishment which has similar function as Adarice and is being fed by the same

gravitational irrigation system.

It covers.an area of 720 hectare of irrigable land out of 1,120 hectare irrigable lard

for the Farm Settlement Scheme. The other 400 hectares of irrigable land was covered by
t

World Bank Rice Project now Enugu State Rice Project.

 In the Do-Anambra rivers area, ,it is part of the 28,000 hectares in seven (7)

independent project areas which were recognised a5 net irrigable areas oli accoun[ 01'

topography, soil characteristics, availability of water resources, and so on. Rice has been

envisaged as the main crop to be cultivated in view of high land productivity of his crop

and of general observation of the physical condition of the areas being favourable to

,- growing rice under irrigation condition. In addition to 720 hectares of irrigable land, 111s

company may be developed for the commercial production of cassava and cassava procluc[s

for human consumption and industry, maize for production of livestock feeds througli a

vertical integration system envisaged by the company.

It has reclaimed land and constructed 720 hectares paddy fields and pilot filr~iis.11

has also 85 km of farm roads and bridges, 14.10 km of main canals and 52.10k1n of

distribution or (irtiary canals, 52.66 km of drainage canals and administrative offices. I t has

the power house as its nucleus and its main gate is Obina river which supplies Adarice

water for rice planting. There is a dam for harnessing the main gate, primary, secondary

and distribution canals for rice production. Water course is from tlie main gate canal ar lil i r

passes through the secondary canal to the tertiary or distribution callat. The caluls are

' operated by gravitational pull or force and the spill way or wasted water way regula~esthe

volume of water going to the main canal.

It has five (5) building blocks as senior staff quarters and 35 building blocks as
 junior staff quarters with villages 1 and I1 of the Farm Settlement Sclierw contiiini~~g
95

housing units each. There is only or^ ,small market and one major road which leacls to

Adani town with some other track roads as outlets to other areas like Ukpata and Omasi

towns.

In Adarice, cropping occurs twice yearly - rainy season and dry s e a w . The

,. organisation of the production department consists of pla~ita~ion,contrnl a ~ fl l ~ r ~ n

tnachinery sections. The plantation section consists of six (6) zones, ~umely,Easter11m1

Northern zones, Southern zones 1, 11, 111 and IV and pilot farm corresponding to [he

division of the irrigable or rice production areas into six (6) zones as ~nentio~icd
and pilo[

farm. The zones are where the participating farmers cultivate their rice while he pilo[ til1.111

is for commercial rice production and agronomic research works. Tile control swtio~~
is

for rice milling ind control of farm inputs and labour. .The farni ~nacl~iliery
seorio11is 1'01.

operation, repair and maintenance of farm machinery.

The company's current staff nominal roll is 35, consisting of 8 senior staff and 27
..
junior staff.

Also the current participating farmers nominal roll is 314.

' 3.2 Sampling Procedure

A lisi of the names of participating farmers attached to the project was obtained
*
from the secretary, Adarice project participating farmers. It contained the rimes of those
farmers who cultivated rice from 1979 to 1998 in the project area. From the list, silnple

random sampling technique was used to select 100 participating farmers who cultivated rice

in the area from January 1, 1993 to December 3 1, 1997.

Also a list containing the names of the current project officials was vblaillrcl Ir'i~rl

the project's General Manager.fom it, 20 officials of the project were selected usirlg si~nplt:

random sarnpl ing technique.

Altogether, 120 respondents comprising of 100 participating I'ar~nersand 20 proiecr

officials were interviewed for the study.

3.3 Data Collektion

The data required for the study were obtaincd through primary and ~ec011(li\ry
sources. The primary sources which are cross-sectional, involved the use of two sers ol'
structured questionpaire to solicit information about the management problems of die
project and the socioeconomic characteristics of the participating farmers. The
administration and collection of the questionnaire were done by the researcher to ensure
efficiency. The secondary sources which are time-series data involved data collection on
L

financial statements as well as costs and revenue items from the participating farmers of the
project. The frame for the time-series data collection spanned through 5 years, from Janilary
1 , 1993 to December 31, 1997. Other secondary sources included textbooks, journals,
newspapers, magazine, welcome addresses presented by the project and periodicals.
3.4 Data Analysis
The various objectives were analysed using the relevant statistical tcmls and
econometric techniques.
Objectives 1 and 4 were analysed using descriptive statistics. Objective 2 which
1
dealt with the analysis of financial structure of the farmer s rice production enterprise
employed four basic financial statements- the balance sheet, income statement, statement of
changes in retained earnings and the funds statement to examine the basic financial data
available. In view of the value to be derived from analysing the financial structure of a
business enterprise, the need arose that the financial position of the participating farmers
was looked into. Such analysis was considered useful to the owners/farmers, their creditors.
government, society and potential investors as well as Inanagers and researcl~ers.l'hc
managers require it to know whether the business is growing; the owners/far~iiersuse i t lo
plan business changes and to expand, reduce or stop production; investors need it for
determining profitability potential of the business and whether to go in or not: governliiel~t
needs it for proper policy making such as tax assessment on the farmers and the fxrn and
for government grants, subsidy, and so on; while creditors/lenders use it to assess the
solvency of the business undertaking to know if loans should be given (Murphy g
t d.,
1978).
Consequently, the financial structure of the average plot of the farming enterprise
which is 0.5' hectare was then analysed to determine its overall position. To achieve his
objective, 4 basic financial statements - the income statement, balance sheet, funds
statement and statement of changes in retained earnings of the participating farmers' average
plot of 0.5 hectare were studied to understand the accounting picture of their rice production
enterprise operations and financial position within the period covered by the study. The
analysis of the financial structure was employed to examine the basic financial data available
to the researcher to appraise the production enterprise's relative riskiness, protit potential
and general management competence.
The balance sheet of the average plot was analysed to describe the resources that
were under the enterprise's control over the period covered by the study and to indicate tlit:
sources of these resources. It was also used w illustrate the liabilities, owners' equity and
assets of the production enterprise all through the period.
The income statement, one of the took of analysis of t'illarlcial pvsitioll of an
enterprise, was employed to determine the financial trcnu or die tliean val:~e of rlie F m w ' s
rice production enterprise over the period covered by tlie study. Tliis measured the success
or failure of the average farmers in rice production enterprise by determining the amount of
profit earned or loss incurred, that is, the growth or decline in its income other than
distribution or withdrawals of funds by owners and creditors. Use of capital structure ratio
(CSR)was also employed to investigate or determine the proportion of debt financing
(creditors' equity) to the participating farmers' equity in the business. Tliis serves as all
indication of the participating farmers' enterprise's v iabil i ty and read iness to IWC~ iis
t d..1980: Limmack.
obligations (debts) as they mature (Welsch g d.,1987; Matulich g
1985; Smith ad.,1983; Murray ad.,1980).
Computation of the CapW Sbucture Ratio (CSR)

The CSR using debt equity formula was computed thus:

TL
CSR=-
TOE
where CSR = Capital Structure Ratio
TL = Total liabilities (debts) otherwise called total (long and short Lerm)
creditors, equity
#. TOE = Total owner. s equity or net worth.

In order to understand the long term solvency of the participating farmers rice
production enterprise and the relationship amongst, total assets, debt and equity titia~ioi~ig
in

the business, the three interrelated capital structure ratios: debt-equity ratio, Debt to totiil
assets ratio and equity to total assets were employed and analysis made.
In ordergto determine .the percentage of the participating farmers rice protluctior~

assets that was financed by debt, it was necessary to analyse the debt to total assets ratio of

the farm enterprise. This is because the higher the percentage of the ratio, the greater the
*
risk that the production enterprise would not be able to meet its financial obligatio~iswl~en

due.

Objective 3 was analysed using Net Profit Margin (NMP) technique. Net income
analysis used to determine the costs and returns of an enterprise, is the profit from the
production and sales operations, and this represents labour, tnanagelnent/ad~ninisuative
costs, equity capital, and so on used in running the business (Kay, 1981). Net profit margin
on the other hand, is the ratio which establishes a relationship between net protit realised
and sales made by a given business concern within a given timc. This is computed thus:
Net Profit after tax-
Net Profit Margin (NPM) =
Sales realised
(Arene and Ndomadu, 1997)
Since every production enterprise is meant to generate profit to increase the

ecoiiomic stand of the owners, creditors and the entire society, the net profit. margin
technique was employed to determine how the participating farmers were faring fina~lcii\lly

and economically in their business. Consequently, the Net Profit Margin (NPM) of rhe
enterprise was analysed and ratios obtained for the consecutive five years covel-al by ~ i w

study. These ratios established a relationship between net profit realised after tax and sales
made by the partkipating farmers. The Net Profit Margin (NPM) was also a measure of the
farmers' ability to turn each Naira of sales into net profit. It also shows the managen~e~~r's
efficiency in input procurement, production, administration and sales of the conlinodity

(rice paddy) produced.

Analysis of variance was done to determine significant differences between the

profitability of the rice enterprise when all the harvested paddy rice are sold during the post-

harvest period (p,)and when they are sold during the pre-harvest period .
r *

For this analysis, the Student's t-test variant was used for the two sample means.

The analysis was based on the assumption that the underlying population is norn~;tllv
distributed. The Null hypothesis is H,, maling that there is no significant differenu

between the two samples and d . That 4 = P2or

That is, the two samples have the same mean. The alternative hypothesis is HI, '
/

meaning that there is a significant difference between the two samples and w). That is,

+ or f 0.That is, the two samples do no1 have the same mean.

The null hypotl~esiswas tested agai 11sttilt: al t c r ~ c t i wI1 yptrthesis, utilizing the fact

That is, the t-ratio follows a normal distribution where t,,-, = tdistribution with n-1 . degrees
/

of freedom, t = tstatisti~.a = sample m a n , ll. = ppulatioa man and S x = estimate of

the standard error of the mean. (Christensell and Swup. 199 1 ; Burt'ord, 1968).

A twe tailed test of the tdistribution at 0.05 or 5 % level of significance was chosen

to decide whether to accept or reject the null hypothesis. If - Q,,,, a t 5 Q~-,,, &, the

hypothesis is accepted if t < - 4,, a or t > + t,,,-,,,, the hypothesis is rejecled. The

confidence interval OK ~iticalregion is given as P (- 1.96 < t < 1.96) = 0.95.where P =

probability that t or t n-1 lies between -1.96 and 1.96. A variable is significant if it lies

outside the critical region and is non- significant, if ir falls within the region. /
 The mean scores of the two samples were estimated to ensure that the t-ratio or t-

statistic was sufficiently large to warrant the acceptance or rejection of the H,.
 CHNYrER F O W
4.0 RESULTS AND DISCUSSION
4.1.0 Socio-Economic Characteristics'sf the Participating Farmers

In carrying out the survey, the major soc'io-economic characteristics of the . I

participating farmers were studied and analysed. Such characteristics as sex, age of the

resppndents, their marital status, educational attainment as well as their family size were

studied and analysed. Also considered were their level of exposure to formal training ill

agriculture (crop production) as well as on the job training in rice produc~iu~l

i~icludi~ip
rilcir

years of experience as participating farmers of Adarice Production (Nigeria) Limikcl.

4.1.1 Sex

Fable I: Sex of the Participating Farmers

. .
Sex No. of respondents , % of respondents
-..-

Male 82 X2.Oo

Female 18 18.00 .
Total 100 100.00

Source: ~alculacedfrom field data, 1998.

From the results in Table 1 above, the relative composition of the male and female
 gender in the production indicates that a large percentage of the participating farmers (the

respondents) were males (82 %) while only a small percentage were females ( 1 8 %). The

production enterprise was tedious and exhaustive of time, energy, finance and other

resources from the farmers. This resulted in the low percentage (18%)of the female gerltlcr

in the production enterprise.

4.1.2 Age Distribution of the Rttspollde~~ts

Table 2: Age Distribution of the Respondents

Mean age distribution No. of respondents % of respondents

Total 100 100

;

Source: Calculated from field data, 1998.

Table 2 above indicates that 53 % of the respondents lie within die mean age ot' 35

years. 27 % iie within the mean age of 45 years whilc 20 % lic w i h i n the mean ilge u i 55

years. There were no respondents in the age range of below 30 years aid above 60 years.
 This is attributed to the fact that youngsters and aged people were not active participants in

the rice production enterpriseownership. At the age of below 30, the urge for urban life

and enjoyment of basic infrastructure is a great barrier to rice production which is usually

carried out in the rural setting. it could also be due to lack of finance to make up the capital

structure which the intensive and money-consuming nature of rice productiorl e~iterprise
w

chllal~ls.Also at the age of 60 and above, the farmers retire from active far111labour arid

this is prominent in rice production.

The bulk of the respondents who are distributed in the age bracket of 30 to 59 years

were there to generate quick money (capital) which rice production enterprise usually gives

to the farmers especially to those whose enterprise is profitable. Some of' then1 also engage

in rice product3on enterprise simply to save some mney at the end of the year or

productiorl period or to have an accumulated saving which will be used to offset some of

their expected financial responsibilities in the family.

 4.1.3 Marital Status
Table 3: Marital Status of the'~espondents 1 I
I
Marital Status No. of respondents % of respondents I

i
Single 28 28 i

Married 67 67

w Total 100 100

Source: Calculated from field data, 1998. 1

Table 3 above shows the marital status of the respondents. It

indicates that a greater percentage of the respondents were married,

covering about 67%of the total, 28% were single while only 5%were widows.
It also shows'that most of the farmers ui~derlookthe business to enable them
cater for their families and their economic needs.
4.1.4 Highest Educational Attainnlent

Table 4: Highest Educational Attainment of the Respondents

Educational attainment No. of respondents % of respondents

None
FSLC
WASC/TC I1
NCE/BSc/BA/BED
Total 100 . 100 ,
Source: Calculated from field data, 1998.
Table 4 above shows the highest educational attainment of the
respondents. Results show that ahout 47% and 33% of the respondents
obtained First School Leaving Certificate (FSLC) and West African School
Certificate (WASC)/Teacher's Grade I1 Certificate (TC 11) respectively. Those
who did not go to school were 13% while those who attained higher
education levels constituted only 7%. The results implied that most of the
respondent^ fall within the educational class of First School Leaving
Certificate (FSLC) and West African School ~;rtific~te
(WASC)/Teachersl
Grade I1 (TC 11) cekficate holders. They were literate enough to be able to
keep good farm records, study modern and improved methods of rice
production and exercise promising manqyxial skills in the rice
business. Some of them also had on tllc j l training experience when the
Japanese expatriates who established Llie project were available to them.
&~~.C+(NC~~QYQ&S
Those who attained higher education and had Ngegenan Certificate inA
 Degree in Science, Arts or Education (BScIBAlBED) were few because of the problems of

the present rice production enterprise ill the project which forced them to go out of h e

business in search of greener pastures. Some of tlwm illso had formal rciining in agriculture

especially in crop production and soil science in their higher education.

.- 4.1.5 Family S
ie of the Respondents
z

Table 5: Family Size of the Respondents

Family size No. of respondents % of respondents

i Total 100 100

r
--
Source: Calculated from field data, 1998.

Table 5 above shows the family size of the respondents. Results ill h e table sliow

that most of the respondents had family size of 1 - 5 and 6 - 10 with the two groups S L ' ~ I . ~ I I ~

36% and 54% respectively. Very few of the respondents had large family sizes, since the

range of 16-20 scored only 2 % and 1 1 - 15 scored 8 % .

4.1.6 Years Spent with Adarice as Participating Farmers

Table 6: Years Spent with Adarice as Participating Farmers by the respondents.

Year period No. of respondents % of respondents

Total 100 100

Source: ~alculatefrom field data, 1998.

Table 6 shows the respondents and rlie yem; thcy h w r y-wit with Adarice as

participating farmers.

Out of the 100 respondents, the.number who spent 20 to 23 years with ~zarice

scored 40%, recording the highest. They are farmers who were part and parcel of the. Farm

Settlement Scheme which was established in 1965 during Dr. M.1. Okpara's regime as the

Governor, Eastern Nigeria, and who joined Adarice in 1975 when it took oft'. They were

resident in the farm settlement villages 1 and 11 and were particiyating far~ners.
 73
Those who scored 20% have not spent much years with adarice as
participating farmers, spending only 1 - 4 years. Note that the years spent by
the farmers do'not systematically follow that they joined the project in 1994.
Some of them joined the project at earlier years but dropped off because of
their inability to measure up in the production requirements of the
enterprise. Some of them due to failures incurred in the business decided to
withdraw meanwhile to enable them offset their economic problems.
Note also that none of the respondents fell into the age range of 15 -
19 bracket, meaning that there is high years of experience gap between those
-
of 20 23 years and other age ranges.
. Adarice project's participating farmers were not limited to the fqrm
settlers alone but included many other farmers from other places who were
interested in fanning in the project area.
4.1.7 Rice Partidpnting Fanners and the cultivated ~ectare'in
1998 Rainy Season Rice Cropping 1

I
Table 7: Rice Participating Farmers and the cultivated Hectare in 1998 I

Rainy Season Rice Cropping I

I

Ha cultivated No. sf fanners % of farmers

/
3.0 1 0.3
Total 259.5 314 100.0
Source: Calculated from field data, 1.998.
The above table (table 7) shows the rice participating farmers and the
hectarage cultivated in 1998 rainy season rice cropping. The table shows that
most of the farmers cultivated 0.5 and 1.0 hectare, recording significant
pereentaghs of 41.7 and. 55.1 respectively. It also shows that none of the
farmers cultivated above 3.0 hectares. it was only one'farmer who cultivated
an area of 3.0 hectares.
However, all the respondents were those who were participatlsg
farmers, especially within the period covered by the study. They all planted
rice on commercial scale and the size of their farms ranged from one plot of
0.5 hectare to up to eleven plots of 5.5 hectares. The allocation of the land by
the project management was done on plot basis, each plot measuring 0.5
hectare. Each farmer was allocated as many plots as he could afford to
 75

pay for and maintain. Thus, over one thousand farmers from Adalii town and e~ivirons

struggled for the allocation. The reductiotl in boll1 area cultivate~land llic ~iu~iibcr
of

participating farmers could be due to high cost of .productioii a i d poor returns ur the

enterprise.

4.2.0 Analysis of the Financial Position of the Participating Fanners

4.2.1 The Balance Sheet

The results (Table 8) show that the production enterprise operated only on current

liabilities, which consisted of operating on current loan and accrued interest (100%)on

current loan, and current assets, which consisted of cash in hand and stocks/i~ive~~tories
as

well as the owner's equity capital. They show that there were no intermediate arid fixed

assets and medium and long term liabilities of their own. This is because the participating

farmers relied on the project for their intermediate and futed assets like land, machinery and

equipment as well as on external labour. All these were provided from outside the

participating farmer's rice production enterprise. The short duration of the pr(duc~ion

enterprise in the year did not encourage permanent labourers to be kept by the fanners.

he balance sheet results also show that liabilities increased progressively along the
period with 'maintained 100% interest charges payable within the current accounting per id,

with 1993 having no liabilities and 1997 having the sum ofW 50,000.00 as liabilities tiv
 rice paddy production of the same plot af rice paddy. That is, liabilities ranged from W

0.OO.W 6,666.00,W 10,000.00,H 20,O(X).OO tohd SO.O(K).(K) in 1993, 1994, 1995. 1996

and 1997 respectively. It also has a net worth of the sun^ ofW 12731.00 in 1993 ardN 0.00

in 1997. That is, net worth ranged frombd l2,73l.W, W 9,428.00,W 11,6!J7.W,W

4,667.50 to 0 in 1993, 1994, 1995, 1996 and 1997 respectively for the production of the

.- same plot of rice paddy. Consequently, a plot of rice paddy which cost the sum ofW

12,731.00 in 1993 also cost the sum ofW 50,000.00 in 1997. That is, the costs ranged

1995, 1996 and 1997 respectively.This is a reflection of the effect of inflationary rrelicl on

the cost of production over the years covered by the study.

Also the total assets of the crop production enterprise rose from W 12,731.00 in

1993 toW 50.0b.00 in 1997, ranging fromW 12.731.00,# l6.094.W, W 21.6q7.50. w

24,667.50 tobf 50,000.00 in 1993, 1994, 1995, 1996 and 1997 respt..ctivt.ly.
 It should be observed that the increase of the assets, liabilities and net worth of the

average farmers' rice production enterprise resulted from continuously increased cost of

production over the period covered by the study. It may also be a consequence ol' other

factors like managerial deficiencies of the farmer, reduced availability of labourers and fain

machinery and equipment leading to more charges, infestation of pestsldiseases a d high

cost of loan capital, that is, high interest charges of 100%.

4.2.2 The Income Statement or Statement of Profit m d Loss Accolint

The analysis of the income statement of the rice enterprise shows a progressive

decline of net profit for the period covered by the study at both harvest a d pliming periods

respectively (See Table 9). At both periods, rice production as a business had beell

increasingly declining in profitability. It was especially felt by farmers at harvest period

L

when, besides exorbitant interest rate of lo%, the sales revenue was too low. Farmers who
more
sold their produce immediately after or during harvesting were bound to incur much4losses

than during the period of planting. It also explains the need for rice paddy storage and the
L

provision of storage facilities for the farmers.

Table 9: Mean Values (N) of Income Statement Item of 0.5Ha Plot at Pre-harvest and

Post-harvest Periods as at December 3 1,

Year
-- -

Pre-harvest Period:

Gross sales (Paddy)

less Production cost

less ~nte'reston loan (100%)

IeSs Current loan

less Storage costs

Net ProfidLoss

Post-harverst Period:

Gross sales (paddy)

less Production Cost

less Interest on Loan (100%)

less Current Loan

Net Profit/Loss

Source: Calculated from field data, 1998.

Table 9: Mean Values (N) of Income Statement Items of 0.5Ha Plot at Pre-harvest and

Post-harvest Periods & at December 3 1 ,

--
1
'Pre-harvest Period:

Gross sales (Paddy)

less Production cost

less ~nte'ieston loan (100%)

le$s Current loan

less Storage costs

Net ProfitJLoss

Post-harverst Period:

Gross sales (paddy)

less Production Cost

less lnterest on I a n (100%)

less Current Loan

1 Net ProfitJLoss

Source: Calculated from field data, 1998.

 Farmers however were bound to lose in economic returns of their rice produce.

Most of them were married (See Table 3 on Marital Status) and were usually faced with

settling family matters (See Table 11 on uses of funds) and even paying off some debts that

might be owed during the period of production. To avoid trouble and difficulties from the

creditors, they had to sell out the produce at any cost during the period of harvest. Some

.- sold part of their produce during the period of harvest to enable them finish up paying their

harvesting costs.

The data show tliat it is only ill 1993 that ar dVCi'hgi plot of rice pxidy 142s

completely free from the use of borrowed capital . At all other years, the farmers w t w
forced to borrow to enable them embark on the capital intensive and time sensitive activities
of h e various stages of rice production enterprise.
Note that in 1997, the farmers lost - N42687.5 at post harvest period and - N.35557
at pre-harvest period per 0.5 hectare plot. The loss might be due to high cost of
production, high cost of farming inputs like fertilizer and insecticides, low yield and low
income. This led to a lot of farmers abandoning the enterprise to only a few in 1998 who
had to go in for one reason or another. Out of over one thousand farmers who used to
struggle for land allocation in the project area in the previous years, ody a total tit' 3 14
farmers engaged themselves again in 1998 cultivating only a total land area of 259.5
liectares (See Table 7 above). Those who left the enterprise had to look for an alter~mive
means of survival and meeting their econoniic needs.
 81

4.2.3 Statement of Changes in Retained Earnings

Table 10: Mean Values (N) of Statement of Changes in ketained Earnings of 0.5Ha plot at

Pre-harvest and Post-harvest Periods as at December 31,

Y w

At Pre-harvest Period:

Net Income (N)

Income Withdrawn (N)

Balance of Retained Earnings (N)

At Post-harvest Per iod :

Net Income (N)

Income withdrawn (N)

lP
Balance of Retained Earnings

Source: Calculated from field data, 1998.

Since there should .be a link between the illcome statement and the balance ~ h e e ~ ,

there is the need to look into the records of the farmer .to understand ihe cliznees occurring

in his retained earnings for the period covered in the study. In other to expand the business

when enterprise is progressing or making some profit, investment in such itenis as

machinery and equipment, inventories, and so on, becomes imperative.

Table 10 above shows the stacement of changes in retained earnings of rhe average
 participating farmers' plot. It should be observed that it is only in 1993 and 1994 that at

harvest retained earnings was positive. The other years covered under the study recorded

negative or no retained earnings. Nothing was even withdrawn since net income turned out

net losses for the per i d .

However, during the planting period, retained earnings record was positive for the
,- years 1993, 1994 and 1995 with 1996 and 1997 turning out negative again. Also within the

period 1996 and 1997, no fund was withdrawn for personal uses by the farmer since he had

to look for alternative ways of settling his creditors or clearing his liabilities.

The positive retained earnings also indicate that the farmer had earned an income

and his withdrawals had been less than the income reported.

4.2.4 Funds ~ktementor Statement of Changes in Financid Position

In order to understand how the participating farmers' funds flew in the business, it

was necessary to analyse or examine their financial activities during the period covered by
*
the study.

Tables 11 & 12 summarized the changes that have occurred in the tina~~cial
pixilion

of the averige farow's prtwluctiu~lcrluprise, how thc production enterprise had bee11

linanced a ~ how
d the financial resources had been used during the period covcrcd i)y l l u
study. It shows that the participating far~nerssourced their funds from both savings and
 borrowing in the course of embarking on their rice production
e
enterprise.
As regards borrowing made or sourcing of funds from the outside

through creditors, Table 11 shows that all farmers or 100 % of the respondents
sourced their money from money lenders and cooperative societies/ESUSU. It
I

.also shows that 33%'of the capital used for an average,farmerls plot was

sourced from friends/neighbours. Consequently, the farmers had no alternative

in external sourcing of funds to balance their capital structure than to resort to
ESUSU/Cooperative Societies. The project did not offer them incentives like
subsidies or soft loans and banks' case was even worse. As a result, money
,'

lenders or Cooperative Societies/ESUSU increased the interest charges on

loans made to them up to 100% or more depending on the duration'of
payment. Money from friends/neighbours was however obtained with less than
100% interest but it was usually smaller than the farmers needed to
meet up attracting the time sensitive and capital intensive rice production
enterprise activities. Hence after getting the capital from friends/neighbours,
farmers s t . had to go to money lenders.
 84
Table 11: Funds Statement of the Respondents
I
1
Sources of funds No of responde~lts % of respondents i
Borrowing from:
,
I

Money Lenders 100 100 I

I
ESUSU/Cooperative societies 100 . 100 I
Friends/neighbours 33 33 j

Saving from:
Salaries and wages 42 42
Sale of rice proceeds 100 100
Sale of other farm ~roceeds 100 100

Uses of funds
Acquiring tixed assets 43 43
crop production for home 100 100
consumption
Solving family matters
Settling Social activities
Reinvestment into rice production 100 100
Source: Calculated from field data, 1998.
~ u h i p l eRespgnse* Some of the respondents gave more than one source or
use of fund. Consequently each sotlrce or use bf fund was analysed per
number of respondents our of the total of 100.
.A
!.
Table 12: Percentage of the Respondents who sourced their Capital
through Savings only, Borrowings and Both. +

Year 1993 1994 1995 1996 1997

Sources of funds % of Resp % of Resp % of Resp
- % of Resp
- % of Resp
-

, Savingonly 100 50 80 '67 -

Saving andBorrowing. - 50 20. 33 50
Source: Calculated from field data, 1998. SQ.&W'~ w a as,*& ,
The other souces of funds included savings which caml dom,
 of rice proceeds and sale of proceeds from other farm produce especially cassava tubers.

Since there was dwindling net returns from rice proceeds over the years, proceeds fro111

other crops and livestock as well as salaries/wages for those eqggec! i!l civil service work

or other wage-paid. work were resorted to. With increasing economic crunch and high cost

of living in the country, savings as a source of capital or fund was becoming a hard thing to

come by. That is why some of them have devised another means of helping thenwlves by

constituting groups of thrift aid associations whereby they generate molley for the~nselvesas

capid for the following planting season to avoid the cut throat interest charges of the

money lenders.

Table 11 above also shows how economic resources generated by the participati~ig

farmers were used. It indicates that funds generated by the participating farmers from their

rice production enterprise were used to acquire fix4 assets like motorcycle, Iloust:

furniture, food grinding machines, bicycles, and so on for personal or family uses,

production of crops for home consumption, solving family matrers, serlling social activities

and reinvestment into the rice.productio~~

enterprise. All the farmers used their gelkited

funds for production of crops for home consumption, solving family matters and

' reinvestment into rice production. Only 43% of the respondents committed their income in

buying fixed assits. They mostly belonged to those unmarried farmers who had less h m i l y

raponsibilities and those who embarked on expanding their sononlic base by buying i d
 I
grinding machines, and so on. Only 12% of the respondents engaged their funds,in settl ing I I

I
social activities like in clubs.

Table 12 above shows the grouping of the respondents over the tive (5) consecutive

years covered by the study in terms of those who sourced their funds from savings only,

borrowing only and a combination of savings and borrowing during the period covered by

the study. The result shows that all the respondents sourced their capital or funds through

sav'ings only in 1993 and this contributed to the high net profit generated by the Fm-riers

during the period (See table 20 below). Also in the year 1994 arid 1997, a llalr ot' rhc

respondents sourced their funds through savings and half sourced theirs from both savings

and borrowing. Most farmers (80%) also sourced their funds through savings only in 1995.

This, of course, affected their capital structure, net income as well as net protit rnnrgi11

generated from their crop production enterprises and also their general standard of living.

4.2.5.OCapitd Structure Ratio

4.2.5.1 Debt-Equity Ratio.

This was analysed to ascertain the trend of the relative amount of resources
contributed by the external sources (creditors) and internal sources (creditors) and internal

sources (owner firmers) within the period 1993 to 1997 covered by the study.
Table 13: Mean Values of DebUEquity Ratio,Items of 0.5 Ha. Plot as at December 31,

- --
Debt (D) - 6 666 10 000 20 000

Equity (E) 12 731 9 428 1 1 697.5 4 667.5

Source: Calculated from field data, 1998.

e

The results obtained for the year ended 1993, 1994, 1995, 1996, and 1997 (See

table 13) are 0, 0.707 or 70.7%:100%, 0.855 or 85.5%: 100% and 4.285 or 428.5%: 100.

All calculations were based on the information as contained in the farmers average rice plot

balance sheet for 1993, 1994, 1995 and 1996 respectively.

I

The ratios show the degree of usage of debt financing in running the prod~lctiori

enterprise of an average farmer's rice plot of 0.5 hectare. A high ratio shows that [he

creditors' claims or external sources of funds in the rice production enterprise were greater

than the average farmer's owl1 and vice versa.

The above results (table 13) indicate gradual increase in the external sourcing of

funds over the years covered by the study. This means that the high gearing increased

progressively with the years. Since creditor's claims had high or exorbitant interest rates -

100%. a high proportion of the debt-equity ratio was not favourable to the farmer operation '

since a large proportion of the income realised was used to settle financial obligatio~isto his
 I ,

i
creditors. Combined with high cost of production, low yield and income, the production
I
enterprise was not worth embarking upon. Since low gearing reduced with years as i, ,

C I
indicated in the ratios, the profitability of the enterprise decreased with increased external I I

funding to the point of ..lossesin 1996.

4.2.5.2 Equity to Total Assets Ratio

'
The relationship between equity and total assets was also analysed to cle~rniinethe

propo~tionof the total assets financed by the farmers or owners of ~ht:enterprise within [he

period covered by the study.

Table 14: Mean Values of EquitylTotal Assets Ratio Items of 0.5 Ha. Plot as at
December 31,

Year 1993 1994 1995 1996 1997

. Equity (E) 12731 9428 11 6W.5 4 667.5 -
Total Asset 12 731 16 094 21 697.5 24 667.5 50 000
(TA)
- - -

Source: Calculated from field data, 1998.

Results obtained for the year ended 1993, 1994, 1995, 1996 and 1997 show a

. progressive decline in owners' equity in the capital structure from 1, 0.586, 0.539; 0.189 to

0 respectively over the years covered by the study. In 1993, a11 die total assets were

provided by the owners while in the following years, the ratio was 0.586 or 58.6%: 100%,

0.539 or 53.9%: 1 0 % and 0.189 or 18.9%: IW% respectively b r 1994. 1995 51ald 1996.
I n 1997, all the total assets were provided by the creditors so that owner's equity was 0.

unlike in the normal production enterprise where interest charges are not high, this

ratio was not favourable to the farmer owner since his debt capital was usually borrowed

with very high interest charges of 100%. The results also show that the ability of the

farmers to save for rice production enterprise decreased with the years covered by the study.

I t also indicates that the farmers had to look for more fund externally year by year to make

up their capital structure for their rice production enterprise.

4.2.5.3 Debt to Total Assets of the Participating Farmers

Table 15: ~ e a nValues

' of Debt/Total Assets Ratio Items of 0.5 Ha. Plot as at

December 31,

Year 1993 1994 1995 1 996 1 997

Total Debts (D) - 6 666 10 000 20 000 5 0 000

Total Assets (TA) 12 73 1 16 094 21 697.5 24 667.5 50 000

D/TA Ratio 0 0.41 0.46 0.81 I

-

Source: Calculated from field data, 1998.

Resultk (table 15) show a gradual increase in the ratio wlkli ranges from 0, 0.4 1 or
41 %: 100%. 0.46 or 46%: 100%. 0.81 or 81 %: 1 0 % to 1 or 100%: 100% respectively
 I
for the year 1993, 1994, 1995, 1996 and 1997. Following the fact that the higher the !
(
percentage, the greater the risk that the production enterprise would not be able to meet its I
I
1
obligations when due (Smith g a,, 1983), and especially as the interest rate charges by the !
money lenders were so exorbitant (loo%),the risk of settling financial obligations grew
along the years of the study. Note that 1993 recorded no ratio since there was no debt while

- 4.2.6 Liquidity '~atios

In order to determine the short term solvency of the production enterprise or its

ability to meet its current liabilities or obligations, the liquidity ratios were employed to
analyse the relationship between current assets and current liabilities.

Table 16: Mean Values of Current Ratio Items of 0.5 Ha. Plot as at December 31,

Current Liabilities (CL) . - 6 666 10 000 20 000 50 0

Current Ratio = CAICL 0 2.41 2.17 1.24 1

Source: Calculated from field data, 1998.

Table 17: Mean Values of Quick Ratio Items of 0.5 Ha. Plot as at December 3 1, 1
I
I
Year 1993 1994 1995 1996 1997 1
I
Current Assets less Inventory (CA-I) 12 181 14 694 20 247.5 22 267.5 48 667

Currents Liabilities (CL) - 6666 10000 20 000 50 000

Quick Ratio CA-I/CL

Source: Calculated from field data, 1998.

The results of both ratios (see tables 16 & 17) show high liquidity ratios which

decreased with the passing year covered by the study. In 1994 and 1995, the productio~i

enterprise recorded a very high proportion of both ratios - current ratio being 2.41 and 2.17

for 1994 and 1995 respectively and quick ratio being 2.20 and 2.03 for 1994 and 1995

respktively. The pploduction enterprise also recorded a current ratio for both 1996 and 1997

which were 1.2 and 1.0 resp&tively and also a satisfactory quick ratio 1.11 for 1996. It

also shows in quick ratio that the production enterprise would not settle all its current

liabilities in 1997 without interfering with the inventories/stock, the ratio being 0.93. I n

1993, as at December 31, there was no ratio - current ratio or quick ratio since there were

no liabilities.
 43.0 Net Profit Margin WPM)

Table 18: Cdst of the Operations at 1 Plot of 0.5 Hectare in (bl) as at

December 31, /

Cost of these operations in 1993 1994 1995 1996 1997

rice seeds for planting 511 550 1400 1450 2 400
Land rate ,1025 1025 1025 1 025 1 025
Land.clearing/cultivation 2300 3000 2500 2500 3 250
Nursing making 290 250 340 340 250
lkansplanting 700 800 1800 1800 2 050
- Pests/Diseases control - - 500 530 530 , .

FeNlizer and its application 930 1 950 2 400 3 300 9 300

Weeding 620 1050 3250 3860 2 380
. Scaring of birds 1060 1376 1460 1740 1 750
~a&e+stin~, Threshing and
haulage 2 505 3 469 4432.5 5 612.5 5502.5
Supervision fee 2100 2250 2300 2500 3,000
Total cost 12 041 25720 21407.5 24657.5 31 437.5

Source: Calculated from field data, 1998.

Table 19: Rice Paddy Sales (N) from 0.5 Ha. Plot at Pre-harvest and post-
harvest Periods as at Decernher 31.
I
Year
- --.- 1993 1994 1995 1996 1997 II
Mean number of bags of 50
k/plot 25 23.8 18.25 15.25 15.5 I
I
I
At Pre-harvest Period:
Sales per bag 1800 2400 2400 . 2600 3000
Total sales/plot of 0.5ha 45000 57120 43800 39650 46500
/
At Post-harvest Period:
Sales per bag 970 14000 1100 1800 2500
Total sales/plot of 0.5 ha 24250 33320 20075 27450 38750

~ourc;: Calculated from field data, 1998.

Table 20: Mean Values (N) of Net Income Items of 0.5 Ha. Plot at Pre-
harvest and Post-harvest Periods as at December 31,
Year 1993 1994 1995 1996 1997
At Pre-harvest Period:
Total sales 4500 57120 43800 39650 46500
Less cost of production 12041 ' 15720 21 407.5 24657.5 31437.5
Gross Income 32959 41400 22392.5 14992.5 15062.5
interest on loan - 3 333 5 000 10 000 25,000 I
Lessloan payment . - 3333 5000 10000 25000
Less storage costs 625 714 638.75 610 620
Net Income 32959 34020 11753.75 -5617.5 -35557.5
At Post-harvest Period:
Total sales 24250 33320 20075 27450 38750
IRSS cost of production 12041 15720 21407.5 24657 31437.5
Gross Income 12209 17600 -1332.5 2792.5 7312.5
IL~. interest on loan - 3 333 5 000 10000 25000 1
Lessloan payment - 3 333 5 000 10 000 25 000
Net Income 12209 10934 -11332.5 -17207.5 -42687.5
Source: Calculated from field data, 1998.
 9.4
4.3.1 a o s s Yrofi t Margin (C ij.11)
' I

Table 21: Mean Values of Gross Protit Margin (G.P.M) Items of 0.5 I-Ia.Plot i
I

at Pre-harvest and Ynst-harvest Periods as at December 31, !

Year 1993 1994 ,1995 1996 1997

Production cost (N) 12041 15720 21407.5 24657.5 3J437.5

Total sales at Pre-

- harvest (N) 45000 51700 43800 396.50 46500

Total sales at Post-

harv'est period (N) 24250 33320 20075 27450 38750
GPM at Pre-harvest
period 0.732 0.725 0.511 0.378 0.324

GPM at Post-harvest
/
period 0.503 0.528 -0.066 0.102 0.189

. 8.

f',
, .: Source: Calculated from field data, 1998.
2,,
The Gross Profit Margin (GPM) of the enterprise was analysed to obtal'n
the ratios for the consecutive 5-yeasperiod covered by the study. Those ratios
established a relationship between the gross income and sales made by the
enterprise ahd indicated the average spread between the cost of goods sold and
the sales revenue (see table 21).
 95

Results obtained for 1993, 1994, 1995, 1996 and 1997 are 0.503 or
50.3k/# of sales, 0528 or 52.8k/Ba of sales, -0.066 or -6.6k/# of sales, 0.102 or
10.2k/# of sales and 0.189 or 18.9k/M of sales respectively at post-harvest and . .

0.732 or 73.2k/# of sales, 0.725 or 72.5k/M of sales, 0.511 or 51.lk/# of sales,

0.378 or 37.8k/# of sales and 0.324 or 32.4k/W of sales respectively during
pre-harvest period, indicating a reducing trend in Gross Profit Margin (GP,M)
progressively with years 1993 to 1997 during the pre-harvest period, a n d a
-
rising and falling and rising trend in Gross Profit Margin (GPM) atpost-harvest
period.
#

It shows that even though there was a reduction in Gross Profit (GPM)
at pre-harvest period, all the results were positive. It also shows that at post-
harvest period there was a rise from 1393 to 1994, and then a sharp fall even to
negative gross margin in 1995 and then a gradual rise agah from 1996 to 1997.
The negative result of 995 (-0.066 or -6.6K/N of sales) might be due to sudden
,
incidence of pests/diseases attack- gallmidge, stemborer and caseworm, which

4'; attacked the crop, as well as sharp rise in transplanting cosls and their effect on
& 2

+ cost of production and yield. There were also poor sales.

 96 f
43.2 Net Profit Margin WPM)
Table 22: Mean Values of Net Profit Margin (NPM) Items of 0 5 Ha. Plot at I

Pre-harvest and Post-harvest Periods as at December 31, I

I
NPM in 1993' 1994 1995 1996 1997 I .

I
N.1 (N) at Pre-
harvest Period 32334 34020 11753.7579 -5617.5 -35557.5
Sales (N) at pre-
harvest period 45000 57120 43800 39650 46500
N.1 (N) at Post-
harvest period 12209 10934 -11332.5 -17207.5 -42687.5
Sales (N) at
- Post-harvest 24250 33320 20075 27450 38750
period
I
NPM at Pre-
h m e ~period
t 0.719 0.596 0.268 -0.142 -0.765
NPM at Post-
harvest period 0.503 0.328 -0.565 -0.627 -1.102
Source: Calculated from field data, 1998.
Results obtained (see table 22) for 1993, 1994, 1995, 1996 and 1997
are 0.503 or 50.3k/N of sales, 0.328 or 32.8k/W of sales, -0.565 or -56.5k/#
of sales, -0.627 or -62.7k/# of sales and -1.102 or -110.2k/# of sales
respectively at post-harvesl a i d 0.710 or 71.9k/H of sales, 0.596 or 59.6lc/W
of sales, 0.268 or 26.8k/W of sales,, -0.142 or -14.2k/W of sales and -0.765 or
-765k/# of sales respectively during theym-harvest season, indicating *a
reducing trend in Net Profit Margin (NPM) progressively with years within
. the period covered by the study. The results show that the fanner recorded
net profit only in 1993and 1994 when sales were made at post-harvest period
while for all other years, that is, 1995,1996 and 1997, he incurred net losses.
They also show that he recorded net profit only in 1993,1994 and 1995 when
8
 97
-
sales were made during the pre-harvest period while for all other years 1996
-
and 1997, he incurred losses. This also shows that net profit or net profit
margin increased with storage of the produce as time progressed towards the
pre-harvest period when the quantity available for sale reduced-
b k i n g at both the Gross Profit Margin (GPM) and Net Profit Margin
(NPM) of the rice production enterpiise within hiperiod covered by the study,
the external funding of the enterprise using the money lenders as sources of

- funds adversely affected the profitability of the enterprise. The owner would
have realised more profit as net income if there was no external funding or if
there was soft loan given to farmers.
I

4.3.3 Operating Ratio

The operating ratio was employed to obtain ratios in relation to return
on total assets employed. The ratio established the relationship between the net
income plus interest expenses and the average total assets employed in the
production enterprise. It was employed to measure the management's ,

performance or its ability to use assets to earn profit or incur losses.

Table 23: Mean Values of Operating Ratio (OR) Item of 0.5 Ha. Plot. at Pre-lmvest Ii
I
and Post-harvest Periods as at December 3 1,

year . 1993 1994 1995 1996 1997

N.l +Intrest
Expenses (N) at:
Pre-harvest period 32334 37353 16753.7505 4382.5 - 10557.5
- Post-harvest period: 12209 14267 -6332.5 -7207.5 -17687.5
~ v . t ; ; t assets
a~
. empl9yed 12731 16094 21697.5 24667.5 50 000

OR at pre-harvest
period 2.540 2.321 0.772 0.178 -0.2 1 1
OR at post-harvest
period 0.959 0.886 -0.292 -0.292 -0.354

* N,1 = Net Income

Source: Calculated from field data, 1998.
Results (table 23) show that within the period covercd by the siudy, ar pcwliarvesr
period, for the year 1993 and 1994 management performed well, earning 0.959 or 95.9kl Pd
of sales and 0.886 or 88.6WY of sales respectively but failed in 1995, 1996 and 1997 by
incurring losses of -0.292 or -29.2WW of sales, -0.292 or -29.2WW of sales aid -0.354 or -
35.4WW of sales respectively. However, there was an improvement in its performance at

pre-harvest period as the enterprise recorded 2.540 or 254 .OW W of sales, 2.32 1 or
?32.IWW of sales. 0.772 or 77.2WN of sales and 0.178 or 17.XliiM sales respectively
 99

!
for the years 1993, 1994, 1995 and 1996 though it failed by incurring a loss of -0.21 1 or - 1
21.lk/# of sales in 19W.
4.3.4 Return on Shareholderst or Ownerst Equity
In order to measure the profitability of the funds from the farmer owners of the
/
enterprise, return on shareholders' or owners' equity ratio was employed. It established the
relationship between the net income after taxes and the average owner's equity capital.
Table 24: Mean ~ a l of
k Return on Farmer's (owner's) Equity (ROE) Items of 0.5
Ha. Plot at Pre-harvest and Post-harvest Periods as at December 31,

Year 1993 1994 1995 19% 1997

Net income (W) at:
pre-harvest period 32334 34020 11753.75 -5617.5 -35557.5
poMmvest period 12209 10934 -1 1332.5 -17207.5 -42687.5
Owner's Equity 12 731 9 428 11 697.5 4 667.5 -
/

ROE at pre-harvest '

period 2.540 3.608 1.005 -1.204 -

ROE at post-harvest
period .0.959 1.160 -0.969 -3.687 -t
ROE = NIIOE
. Source: Calculated from field data, 1998.
 Results (table 24) show that within the period covered by the study, at posl-llarvest
return on owner's equity was positive for 1993 and 1994 and negative tor 1995 and 19%
while during the pre-harvest, there was an improvement in positivity, and hence 1993. 1994
and 1995 were positive at post-harvest and during the pre-harvest period, it was negative for
19% . Note that no result was obtaiiled for 19W since there was no owner's equity capiral.

- Table 25 Mean values of the Various Profitability Items of 0.5 Ha. Plot at Pre-hmest and
Post-harvest Periods as at December 3 1, 1993-1997

Mean at Pre- Mean at Post-

t period
~arves

Sales (N)
Income Statement (N)
Gross Income (N)'
Net Income (N)
Retained Earnings (N)
Gross Profit Margin ,

Net Profit Margin

Operating Ratio
Return on Owner's Equity
..

Source: Calculated from field data, 1-3.

 Table 26: t-Statistic Values for Twepaired Samples: Mean Values at Pre-harvest and Post-
harvest Periods of the Various Profitability Itenzs of 0.5 Ha. Plot as at December 31, 1993

t-compu ted t-tab.(0.05, two tailed)

5.419
11ncomeStatement (N) 5.241
5.419
Net Income (N) 5.241
I

Retained Earnings (N) 1

... pros Profit Margin 3.671

I ~ eProfit
t Margin I 3.857
(Operating Ratio I 1.746
9.899

P I
'6.
f;, Source: Calculated from field data, 1998.
The detailed results of the t-test are slmwtl in append~ces8 to 16. The summary of
the results are shown in Table 26. 'J'he resulls ol ~llct w w a i l d test of the t-distribution at
.05 or 5% level of significance show that t > 4,-,, ., That is, 2.78 < 5.419, 2.78 <
5.241, 2.78 < 5.419, 2.78 < 5.241, 2.78 < 3.07L, 2.78 < 3.857 and 3.18 < 9.899
rrspstively for sales, Income Statement, Gross Income, Net Income. Gross profit margin.
Ne% Wit mugin, and T&m on OWMI'S equity. Since thet-tabulated < t-calculated. for
L
 those profitability items, the null hypothesis Hoor p, = or = 0 is rejected.

Consequently, the alternative hypothesis, HI or t or PI - FL2 fO is accepted.

Therefore, there is a significant difference between the profitability of the rice enterprise
when a11 the harvested paddy rice are sold during the pre-harvest and post-harvest periods at

= .05, two-tailed t-test.

- The deduction from table 25 conforms to the test of significance on the mean values
of the various profitability items mentioned above. Table 25 also indicates that the mean
, values of the profitability items mentioned above were greater during the pre-harvest period
than kt-harvest period.
f
This shows that 4 e profitability of the enterprise is enhanced by the storage of the
harvested paddy rice. This is because a lot of paddy rice is usually sold during the post
harvest period by the farmers to enable them offset their financial obligations. This is most
prominent in farhilies which have no other sources of income or enough sources of income
that will. help them offset their financial obligations in the family and the society. Some of
the paddy rice are processed and consumed by the farmer and his household.
The results of the tdistribution (a= .05, two-tailed test) at 5 % level of significance
show that t-tabulated > t-calculated for the profirability items -retained earnings and
operating ratio. That is, a 5 1 5 4.30. a and (r, 1.746 5 2.78 a respectively for ytained
the null hypothesis H, or P1 = F12 or
earnings and operating ratio (Tabe 26). Co~~sequently,

pl - = 0 is accepted,while the alternative hypothesis H, or 5 FLt or f 0 is

rejected. This means that there is no significant difference between the retained earnings
 103
and operating ratio of the rice enterprise at the pre-harvest and post-harvest
periods at a two-tailed t-test of -05.
However, the results of the mean scores for the two items are not equd
(Table 26), indicating that t h e w is a difference in the two samples.
Consequently, the significant difference may 1x2 observed using t-test variate at
higher levels of significance.

- 4.4.0 Management,Problems from Viewpoints of the Participating

-- Fanners and the Project Officiids
Based on the results of the questionnaire, write-ups, personal interviews
0

as well as observations of the environment by the researcher, the following

problems were articulated which cause a lot of economic constraints to the
project and the participating fanners and hamper their general progress and
improvement in rice production in the project.
 44.1 Problems &countered in Adarice Production Project as
viewed by the Project Officials
Table 27: Problems encountered in Adarice Production Project as viewed
by the Project Officials
Problems No of Respondents % of Respondents
Inefficient personnel 12 60
Funds 16 80
Machinery/Equipment 20 100
Residential quarters/office maintenance 17 85
Attacks from outsiders 9 45
Msting structures maintenance 20 100 ,
Payment of staff salaries/wages & . ,
- incentives 20 100
v

Land AUocation/Management 10 50
Indigenisation of the broject staff 11 55
t

Multiple Response* Out of the twenty respondents each of them highlighted more
than one problem. Consequently, each problem was analysed per number of
respondents and its percentage of the total.
Source: Calculated from field data, 1998. i

The above table (table 27) shows the management problems

encountered in the project as viewed by the project officials. *
Three-fifths of the respondents showed that most members of staff bad
'little or no professional training and experience in the 'job and therefore .

performed poorly. There were few skilled manpower efficient in running the
various divisions of the project as divisional managers.
Four-fifths of the respondents said that there was lack of adequate
planning, shrewdness in n~auage~lie~itof funds and utilization of services.
There was mismanagement of funds generated from the service charges, that is,
land rate, ploughing and harrowing, puddling and rotavating and threshing by
the managers.
 The company was constantly being burgled by men of underworld as
complained by all respondents. There were vandalization or plundering and
looting, neglect or non-maintenance of existing machines and equipment and
vehicles. .Out of a total of 44 equipment and vehicles recorded in the project, y

about 80% were.scraps, 10% in very bad condition and less than five percent
might be senriceable. The giant mill complex was rotting away, the roof housing
the milling machines was partly blown off by the wind, exposirig them to rains
and rust. A reasonable quantity of the mill components such as electric motors
were stolen. Four (4) lacks stone rice mill engines were vandalized, looted and tI
- buildmg burnt down in December, 1996.
b I

Eighty- five percent of the respondents stated that the residential

f
I
quarters of the staff were deplorable, most roofs of houses were leaking, others
had collapsed, doors and windows of houses were rotting away. There had been
no electricity for over 16 months. The kick starter of the generating set was .
stolen and the batteries got rotten. Most of the taps in premises were not
running and most of the pipes were rotting away. The health centre was
nothing to write home about.
Forty- five percent of the rcspondcnts pointed out that the project has
essesantly been attacked by the surrounding cam-ties and individuals.
There were still treats,from individuals/co~munitiesto Adarice to court over
non-payment of debts owed them.'Some of those claims arose from non-
allocation of plots after payment and claims over other services paid for but not
rendered to them.
AU the respondents highlighted that there was lack of funds to maintain
the existinginfrastructure - canals, roads and bridges which have broken down.
The participant farmers
 were woefully disappointed because of the collapse of the main canal w l k h disrupted dry

season cropping. The project tractors were in bits and funds to purchase the spare parts, if

available, were lacking.

The project owed debts or arrears of salarieslwages and allowa~~cesli~~centives

to

their staff for over sixteen (16) months as mentioned by all the respondents. Consequently,
4
- the staff no longer worked as expected and this adversely affected the efticiency of

praduction; Government as well was not paying attention to the problems.

,Half of the respondents complained of lack of competent staff in tecl~nologytransfer

unit to handle the problem of soil fertilitylland allocation management problems, which

adversely affected the participating farmers in their rice production.

The indigenisation of the project by the sons of the soil and politicisation of the

project activities by the people of the area as well as vandalism constituted a great threat to

the proper management of the project as commented by, fifty-tive percent of the

respondents.

4.4.2 Problems encountered in the Adarice Pmduction Project as viewed b s the' '

Participating Farmers

Table 28 shows the management problems encou~~tered

in the project as viewed by
the participating farmers.

~hreehfthsof the respondents indicated the breakage of the main canal (maingda)

which adversely affected dry season cropping and also made their level of productio~lto be
seriously low and revenue generation reduced. The effect of the breakage was also felt by
the farmers during drought period.
Table 28: Problems Encountered in the Adarice Production Project as viewed by [lie

Participating Farmers

Problems No of Respondents % of Respondents

Inadequate storage f a d ities

Land allocation

High cost of production 100 100

Lack of incentiveslsubsidy 57 57

Lack of adequate machinery1Equipment 72 72

Bad roadshridges 73 73

General national economic crunch 100 100

Multiple Response * Out of the one hundred respondents, each of them highligl~tedmore

than one problem. Consequently, each problem was analyzed per number of respondents

and its percentage of the total.

Source: Calculated from field data. 1998.

Four-fifths of the respondents had the problem of capital/fi~\ancefor rice p r o ~ l i ~ r ~ i o ~ ~

 as savings was not easy to make due to numerous family responsibilities embarked upon by

the farmers with their meager income. Going for outside funding was by no means better

and easier as money lenders through personal or cooperative society/ESUSU medium

charged exorbitant interest - 100% of the principal amount and they even demanded the

return of both the principal and the interest within the accounting period.

- Inadequate storage facilities or none at all forced the farmers, as highlighted by b

seventy-six percent of the respondents, to dispose their produce during harvest period which

meahs causing them to have very poor returns. Some of the sales were made to offset their

debt burdens and to handle other vital and immediate demanding family matters.

Three-fifths of the respondents pointed out that the problem of land allocation by die

project management has caused the clashing of farmers over a particular piece or pieces of

land being allocated to more than one farmer in the same farming period. This was one of

the effects of poor soil fertility management since fertile rice paddy plots or soils were

gradually reducing and farmers would only desire fertile lands for their crop production.

Also denial of allocation of plots to farmers by the management and the scrambling for land

due to maladministration by co-farmers and consequently bribery and corruption caused a

lot of economic havoc to the participating farmers.

The Present emnomic crunch in Nigeria as pointed out by all the respondents has

led to the farmers being unable to measure up in rice productiol~enterprise.

 Seventy-three percent of the respondents indicated that the only road leading to

Adani from the project area was untarred and that during the rainy season it developed pot-

holes and became water-logged and muddy. Also, the Obina River Bridge which cross rlie

road broke often all these adversely affected transportation to and from the transport area

and the procurement of inputs and evacuation of produce by farmers. Tractor was the only

vehicle which managed to carry the g d s of the farmers even at exorbitant prices wlle~l 4

m'ke available.

' All the respondents pointed out that high cost of production contributed a greal

problem especially as it was followed by low returns to farmers. Such hazards like pesis i w l

diseases attack were so much on the farmers that they were scared from further production.

Such cases like attack of caseworms, gallmidge, rice smuth, stem borers, added to their cost

of production and reduction in yield. Farmers who resorted to early cropping to avoid the

incidence of pests and diseases attack on their crops have in the other way fallen victim of

wet season weather harvesting and drying problem. This caused regermination of the rice
, . .
seeds and some going mouldy which finally led to economic loss. High service charges to

farmers by the project mtnageinent on land rate, use of tractor, plough, harrow and

rotavator affected them adversely especially the low income earners.

Lack of incentives and subsidy on farm inputs like agro-chemicals as well as

scarcity of tractors were highlighted by fifty-seven percent of the respondents. These

led to high cost of production. The project has at the time of survey only olle functional

tractor to serve many farmers. This caused delay or late,production.

 CHAlPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

The study investigated the financial structure and profitability of rice prtxluCtion

among the participating farmers of Adarice project in Enugu State of Nigeria.

b .
The data required for the study were obtained through primary a ~ dsecondary . t

sources. The primary sources, which are cross-sectional, involved the use of two sets of

structured questionnaire to solicit information about the management problelns of the

project and the socio-economic characteristics of the participating farmers. The

administration and collection of the questionnaire were done by the researcher to ensure

efficiency. The secondary sources, which are time-series, involved data collection on the

financial structure as well as revenue items from the participating farmers. The frame for

the time-series data collection spanned through five years from January I . 1993 to

December 31. 1997. Other secondary sources included text books, jounlals, llews pilorrs

welcome addresses presented by the project, periodicals and magazines.

The data generated were analysed using descriptive statistics, tillancia1 statelncrirs

(income statement. balance sheet, funds statement and statement of changes in retailad

earnings). capital structure ratio, Net Profit Margin technique and Student's t- distribution.

The study discovered that a large number of respondentdparticipating farmers

 Qf
(82%) were males. The production enterprise was tedious and exhaustive4 time, energy,

finance and other resources from the farmers. Also the bulk of the respond en^ were

distributed in the age bracket of 30 to 60 years and none at below 30 years and above 60

years. This meant that the latter group - below 30 years and above 60 years were not active

participants in the production enterpriselownership. Results also indicate that a greater .

- , percentage of the farmers were married (67%)and use the enterprise as a medium of caring

for their families. They also showed that most of the farmers were First Scllcwl Leavi~lg

Certificate (FSLC) and Wcst i4Tiai&ii School Cer~ificate.(WASC). 'l'eaclw's (hide I I

Certificate (TC 11) holders who were able to keep good records, study rnodcrri mI

improved methods of rice production and exercise promising managerial skills.

From the financial statements results, the balance sheet shows bht the farniers

operated only current assets and current liabilities and the owners' equity, while all other

liabilities Massets belonging to the project. The balance sheet results also showed that the

liabilities of the enterprise increased progressively along the period of the study in [lie

course of making up the'capital structure of the enterprise. They also revcaletl thar die

capital structure needed to produce the same plot of rice increased frombd 12.73 1.00 in

1993 to# 50,000.00 in 19m. The income statement indicated a progressive decline of net

income within the period covered by the study especially for the proceeds sold a! liarvesl
Perid. N 11519.00 in 1993 to - N42687.5 in 1997 at post-h;lrvrst p e r i d ;lnd h3&-
I "W1.W 11)
 1993 to - N34937.5 in 1997 at pre-harvest period. The statement of changes in retained

earnings was positive only at harvest for 1993 and 1994 and also during the planting period

for 1993, 1994 and 1995. Funds statement also indicated that farmers sourced their capital

from borrowed. funds: money lenders, cooperative societies1ESUSU and

friendsheighbours, and savings: from salarieslwages, sale of rice proceeds and other corps

- like cassava tubers and livestock. The income generated by the enterprise was used to

acquire fixed assets, for solving family matters, settling social activities ,and reinvest~nent

into dce production and for the production of crops for home comumption. While so~ne

farmers had both savings and borrowed funds in their capital structure, others had only

savings or borrowed funds. Results from the capital structure ratio showed that debt-equity

ratio indicated a gradual increase in the external sourcing of funds (high gearing) over the

years covered by the study. Also Debt a Total Assets ratio gradually increased along the

period covered by the study. However, Equ i ty-Total Assets ratio intl icaled a progreshivu

decline in the ow~ier'sequily 111 LIICclzpilal sb ucture ovcr tllc years covered by the s~utly.So

also were the results of the liquidity ratio.

Results from the Gross Profit Margin for the period 1993 to 1997 indicated a

progressive reducing trend during the pre-harvest period and a rising and M i n g and rising

trend at 'post-harvest period. The Net Profit Margin also showed a reducing trend

progressively with years during the pre-harvest period within the period covered by h e
study. Results from the Student's t-distribution show that there is a significant difference

between the profitability of the rice enterprice during the pre-harverst and post-harvest

per iods.

The data generated also indicated that in the management problems of the project

viewed by the staff, there was inefficient personnel, function allocation, funds, machinery

and equipment, maintenance of residential quarters/offices, court cases, maintenance of r

existing structures, payment of staff salarieslwages, incentives and promo ti or^, land

allocation/management and indigenisation of the project staff. As viewed by the

participi.iting farmers. the management problems encountered included the breakage of

canals (main gate, capitallfinance, high cost of production, lack of machinerylequipment for

production, lack of subsidylincentives to farmers, land allocation, soil fertility management,

bad roadshidies, lack of storage facilities and national economic crunch.

5.2 Conclusion

The results of both Gross Profit Margin and Net Profit Margin of the enterprise

showed that external kurcing of funds using money lenders and cooperative

societies1ESUSU adversely affected its profitability during the period of the study especially

on owner's net income. The owner would have had better net income if the external

funding was accompanied with soft interest charges or grants and subsidies.

The results of financial statements, capital srructurc ratio and Net Profit Margin
showed that the management of the enterprise had a degrading satisfaction in turnilig

enough profit per Naira from sales made. This may be due to poor management or

managerial skills, administrative deficiencies of both the farmer and the project, poor sales

and at reduced prices, low market demand at the point of sales, high cost of inputs and

production costs, high interest rate (100%)charged by the creditors, poor soils generating

poor yield, bad weather and pests and diseases attack, sales made at improper period, and ,
SO on.

I Consequently, the enterprise was not worth embarking upon based on the resulu;

from the average farmer's plot. However, with improved yield and incoinelrevenue under

the same production costs, farmers may be advised to go into production enterprise. This is

for the above average farmer's plot performance. Also the harversted paddy rice was found

to be profitable during the pre-harvest period than post-harvest period.

5.3 Recommendations
i.

Based on the findings of the study and the need to improve on the production and
the prodktion efficiency of the participating farmers and to attract back more farmers illlo

the production, the following recommendations are made.

(a) Offering more training to the farmers should be undertaken - both formal and

informd - on the management practices in rice production, timeliness of operations,

keeping of farm records, how and when to preserve and dispose their rice proceeds
for optimum profit.

Provision of adequate agricultural cred it facilities should be done by the government

to the participating farmers especially soft loans to enable t l ~ r nbalance their capital

structure, improve their net incomelprofit and for their continued stay in producrion.

Subsidizing the cost of production should be done by the project and the goveriimcllt

through the provision of more functional tractors and other machinery alld r

equipment for timely operations and at reduced charges and by reducing the service

charges like land rate, and so on.

Timeliness of operations is necessary for the farmers to enable harvesting and drying

be done during dry weather to avoid the effects of mouldlfungi attack on tlie rice

seeds.

Farme4 should be encouraged to delay sales till during the planting period when

they will make more profit. This is enhanced by providing them with good and

adequate storage facilities and bridge fillancing.

The damaged canals (main gate), bad roads and bridges as well as health clinics and

other infrastructure should be repaired by the project andlor the government to

enable production be at its optimum especially during the dry season and drought

periods.

The management of the project should be reorganised to retlect the early years of
 establishment when there was enough staff, enough managerial persoririel who
t@
should be allocated functions based on merit to enable proper discharge of dutiefbe

carried out promptly, regularly and efficiently to the farmers. This will improve on

the farmers' production and productivity.

(h) Proper accountability should be rendered on the part of the project personnel

- especially the general manager who should utilize the funds generated to offset the r

liabilities of the project and the staff salarieslwages and incentives, in conjunction

' with governments's aid. This will reduce indifferwto work, vandalization and

looting and other bad habits being wried out by men of the underworld

(i) Funds should be provided to the project by the government to ellable the pro.ject

function efficiently.
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 APPENDIX 1
UNIVERSITY OF NIGERIA, NSUKKA
DEPARTMENT OF AGRICULTURAL ECONOMICS
AN ANALYSIS OF THE FINANCIAL STRUCTURE AND PROFITABILITY OF
RICE INTERPRISE; THE CASE OF ADARICE PROJECT PARTICIPATLNG
FARMERS IN ENUGU STATE, NIGERIA

Dear farmer, b

-. The questionnaire is meant for finding out the financial position of the participating
farmers of Adarice production project. A success of this research study will be of help to
both th'e researcher and the farmers of the area. Hence, your maximum cooperation is
needed.

QIE$TIONNAIRE
SECTION A
SOCIO-ECONOMIC CHARACTERISTICS OF THE PARTICIPATING FARMER9
(Please tick the correct one )
1. Sex: Male 0 Fernden

2. Age: (a) Below 30.years n (b) 30 - 40 years n

a ' (c) 41 - 50 years (d)51-60years D
(e) above 60 Years D
3. Marid status (a) married Q (b) single

(c) widowed Q
Highest Educational Attainment:
(b) WASCITC IIIRSA

(c) NCE U (d) Diploma U

(e) B ScIB AIB ED (f) None

Family size: Number in the family
Are you a participating farmer with Adarice ?
(a) Yes (b) No
If yes, what is the size of your farm there and the crop grown?

Have you had any formal training in agriculture especially in rice production?
..........................................
Have you had any on the job training in rice production?
How many years have you spent with Adarice as a farmer?
................................................
Are there any incentives given to the participating farmers to ensure efficiency
of production by the project?

What are the problems you encounter in the general investment'and production,
distribution and sales activities of rice by the project
.................................................
How are they being handl@?
 SECTION B
(Please fill in the following chart)
BALANCE SHEET AS AT DECEMBER 31,

-
 I1 1 Years
I, I Years

Fixed Assets Machinery loan

Equipment loan

Tolal intermediate liabililies

- 1Less depreciation
1-r
I

I Long term liabilities

li
Total fixed Assets a-Tarm mortgage

Total Assets Total liabilities

il
' 1

Owner's worth

FUNDS STATEMENT

BORROWINGS FROM:
Bank
Money Lenders
CooperativeIESUSU
Frienddneighbors
A/C payable ,
4
-

Others please specify

SAVINGS FROM:
I
Salaries and Wages
II~onsumedRicdother crops

I/~ale
of livestock

Isale of rice proceeds

Isale of other crop proceeds

I Govt. grantdsubsid
Donations
I AIC receivable

llothers please specify

/ USES OF FUNDS
--. . .- .. --

1
-4-
Acquiring fued assets Year1 Year2 Year3 Year 4 Year 5
I
repairinglmainlenance of fixed assets
I.
I I I
llproducrion of crops for home

I I I
llso~vin~
family matters
I
Settling social activities
1 I
building up receivables
building up inventories (rice seeds)
 reinvestment into the business
(production activities)

Others please specify

STATEMENT OF RETAINED EARNINGS AS AT 3 I,, DEC, ...

Year 1 Year 2 Year 3 Year 4 Year 5
-
Net income
lncome withdrawn
I

Balance of retained earnings

COST OF THESE OPERATIONS IN

Year 1 Year 2 Year 3 Year 4 Year 5

Rice seeds for planting

Procuring land for rice planting
,
Land Clearing
-
v
Land cultivation (ploughing and
harrowing)
a,

nursery making

Transplanting
Pestsld iseases control(agrochemical used)
Purchase of fertilizer
Weeding
 fertilizer application
Scaring of birds away
Harvesting/threshing packaging
Parboiling and drying
Milling
Storage
-
tax for the crop
irrigation services by the project
@

interest on loan
Others please specify
GROSS INCOMEIREVENUE FROM
Year 1 Year 2 Yearr3 Year 4 Year 5

Paddy rice (both consumed and sold)

Milled rice (both consumed and sold)
NET INCOMEIREVENUE

Year 1

I Paddy rice (both consumed and sold)

I Milled rim (both consumed and sold)

 UNIVERSITY OF,NIGERIA, NSUKKA
DEPARTMENT OF AGRICULTURAL ECONOMICS
AN ANALYSIS OF THE FINANCIAL STRUCTURE AND PKOk'lTABILI'I'Y 01:
RICE ENTERPRISE; THE CASE OF ADARICE PROJECT PARTICLPATING
FARMERS IN ENUCU STATE, NIGERIA.

Dear Staff,
The questionnaire is meant for finding out the financial position of the participating
* farmers of Adarice production project. A success of this research study will be of help to
both the researcher and the farmers of the area. Hence, your maximum cooperation is

QUESTIONNAIRE
MANAGEMENT PROBLEMS ENCOUNTERED IN THE PRODUCTlON
PROJECT
In the course of running the affairs of the project, what are the lnanageme~lt
problems encountered by the following
(a) the general manager
(b) the divisional manager
(c) the senior staff
(d) the junior staff
(e) entire staff
Are there enough staff, efficient in running the various divisions of the project.
.......................................................................................................
If no, in what areas of the project divisions are they lacking and how is it affecting the
project generally?
 How is the economic crunch in the country affecting the activities of the project?

Are there any incentive to the staff to ensure efficiency of procluction?

How are the project problems handled by the government and other agencies?

What are the problems encountered by the participating farmers in the general investnicnt.
-
a ~ production,
~d distribution and sales activities in the project? .....................................
 Appendix 2
The 7 Independent Project areas recognised by the Japanese in the Do-Anambra Rivers
Are. as Net irrigable Areas in 1974

Urn - Uwani Pioneer 1000 On - going

Irrigationproject I
Lower Anambra 5000 Detailed design completed
Irrigation Project [Taken over by Federal Govr
for Aiminbra-lmo River Basin
Uevelop~nentAuthority
lfite Irrigation project ( 3 0 / 38000 with other crops
I/
Adada Irrigation
project '

Umueje Irrigation
7100

3900
12400

15600
with other crops

with ot.I~ercrops
~
+I
project
Adani Irrigation
Project .
2500 10000 with other crops
I!
Flood Plain Irrigation 4700 37000
project

-
Total

Source: Adarice production (Nigeria) Limited

 Appendix 3

Paddy Production since Inception

Planted Areas (Ha) Paddy production

(tonnes)
1 1" crop JulyIDec 1976
- 2""crop Jan/June 1977 101 320 3.2
3Mcrop JulyIDec 1977 250 1 lo0 4.4
. 4"crop JanIJune 1977 250 670 2.8'
5" crop JulyIDec 1978 258 1 186.7 4.6
6'" crop Jan/June 1979 293 787.59 2.68"
7"'crop JulyIDec 1979:
Direct source 315.9Ha 315.9 1 334.175 4.2
Participating fqmers 141.0 141.0 327 2.3
Ha
'8 crop JanIJune 1980 221.9 576.301 2.59
9"'crop JulyIDec 1980:
(i) Direct planting Harvesting 334.29 (CXK) H.P) -
in progress
(ii) Participating farmers: 200 (323H.P)
Paddy purchase in progress
534.29
Total la to 8"'crop 1 906.8 6521.766 3.42
 * (i) H.P = Harvesting in Progress

(ii) H.P = Harvesting in Progress

Source: Adarice production (Nigeria) Limited

 O R m N O G R A M OF O P E R A T K N AND MAINTENANCE SECTON (TENTATIVE)

Operation Maintenance v-V.Wlading)

Subsection chief Subsection chief
i

Clerk

I I I
Data Water Canal Road Structure & Teams
Patrol
Collection Control Maintenance Maintenance House Maintenance
I
- Meteordogy - Leakage - Head spillway . - Slashing - Grading - Repairing .

- Hydrology - Landslie - Intake gate - Desilting - Pavement - Replacement

- Wa:er bss - High water - Checks - Slide prevention - Drainage - Reconstruction
- Cowiumptive use - Vegetation - Twinouts - filling - Filling - Repainting
- Topography - Erosion - spillway - Leakage stop - Slashing - Funitue
- Waler level - Silting - Etc - Etc - Etc - Etc

1Irrigatior! Assistant 1Irrigation Attendant 1Irrigation Assistant 1 Irrigation ~ssistant' 1Irrigation Assistant 2 Carpenters
1Survey Essistant 2 Irrigation Attendants 2 masonslpainters
1 plumber

Source: Adarice P r o d u c t i i R o j e c t
 Appendix 7

Blocks and Croppable Plots in Southern Zone I

PIS = Poor soil .

Source: Adarice production projec~
 Blocks and Croppable Plots in Southern Zone I1

'1

Blocks Total Ha Irrigable Upland Remarks

17 2 - 1 1 P/S
18 4 - I 3 "

19 4 - 15 2.5 "
-
Blocks and croppable plots in Southern Zone 111

W/L = Water Logged

Blocks and croppable plots in Southern Zone IV

I Blocks Total Ha Irrigable Upland Remarks

I
51 1.o 1
52 5 1 4.0 PIS
53 5 1.5 3.5
54 10 5 5.0
55 5 3.5 1.5

S~jurcr:Adaricr production prc!jccl

 Blocks and Croppable Plots in Northern Zone

IIt 18
G.B. I
I
2.5
17.0
.-
2 1 L
II
I
2.5
-.o
8
,> t
-
n
I
3 .-
I
1
?
'I."n ~...- \'I.".-
t ( i2 n PIS)

W/L = Water logged .

Grand total. = 108.5

2 u
140.0 Ha Total Hectrare
91 .O
210
112.0 Total Ha
1.5
---
9.0
 10.5 Ha total Ha Uwland

Blocks and Croppable Plots in Eastern Zone

I Blocks Ha I Ha Croppable I Upland Remarks I

2 10.0 9.5 02'bad
3 10.5 9.0 0.5 0.5WJL. I
4 9.0 8.5 0'"ad
5 3.5 2.5 5' ""'bad
6 7.0 5.0 2.0 nil
7 13.0 9.0 4.0
8 15.0 11.0 2.5 1.5 W/L
9 12.5 11.5 1.O
10 10.0 10.0 -
1I 10.0 10.0 -
1 NPF I 5.0 I I 4.0 1 1.0 PIS 1

Source: Adarice production project

90.0
&j-Q
106.0Ha
 143
Appendix 8.'
Mean Value5 ( M I a t P r e - h a r v e s t and P o s t - h a r v e s t h r i o d s
of $ale# Items of 0 . 5 Ha P l o t a s a t December 3 1 ,

Year: 2

t - T e s t r P a i r e d Two Sample
for Means:

Variance
Obnervati o n s
Pearson C o r r e l a t i o n
~ ~ p o t h e b i z eMean
d
Difference
df

' Source: Calculated fGm field d i i 1 9 9 8 .

 Appendix 9t
Mean Values ( W ) a t Pre-harvest and P o s t - h a r v e s t Periods

of Income S t a t e m e n t Items of 0.5Ha P l o t as a t December 31.

I Y&~,
.'I
Pre-harvds t Post-harves t

1993 32334 12209

1994 34020 10934

1995 11753075 -11332.5

- 1996 -561705 -17207.5

199 7 -35557.5 -42687.5

t - T b s t s P a i r e d Two
Sample f o r Means:

Pre-harves t Pos t - h a r v e s t

M e an 73416.55 -9616.9

Variance 841021275.8 513233619.4

Observations 5 5

P e ~ m o nC o r r e l a t i o n 0.990589628

Hypothe8ized Mean 0
Difference .r

4
df
5,240739529
t Stat

Source: Calculated from field data, 1998.

s
Appendix 10 .*
Mean values (I) at Pre-harvest and Post-Uarveet 0eriods
of Gross Incone I terns of 0.5Ha ~ J o tae at December 31,

t-Test: Paired
TWO ampie for
Meane t

Variance
Obeervations
Paarson Oorrelation
Hypothemized Heam
Difference
df
t Stat .

Source: Calculated fro6 field dati, 19%.

Appendix 11:
Mean value6 (W) a t , Pre-harvest and Post-harvest
~ m r i o d sof Bet Income ZLterns of O.5Ha plot as at Dec. 31,

I Year. Pre-harvest

1994
1995
19%
I 1997
t-Test: Paired lhso
Banple f o r Means 2-

He an
Variance
Obaervat ions
Poaraon Correlation
Pfpothoaisad Mran Diffrrenc
df
t 0t;at

SO^: Calculated from field data,

-- ..-19987
,

Y
Appendix 121
Mean Values ( H I a t P r e - h a r v e s t and P o s t - h a r v e s t p e r i o d s of
. k e t a i n e d E a r n i n g s Items of 0.5Ha P l o t as a t December 31,

re-harves t

1994
1995

t-Test: P a i r e d Two Sample

for Means;
-- - - -

Pos t - h a r v e s t

Mean
Variance
Observations
Pearson c o r r e l a t i o n
H y p o t h e e l z e d Mean
Difference

t Stat
I
L-

Sourde: Calculated from field data, 1998.

- .
Appendix 13:

Mean values, at Pre'4tberve~tand Poet-harvest &,eriode

of Groso P r o f i t uargin Lterns of 0.5Ha PAot ae at Dec. 31 .,

t-Test: Paired Two

Sample for Means:

Me all
~asianae
Obaervat ions
Paarson Correlation
Hypotheeized Mean
Difference
df
t Stat
- - ---

Source: calculated from field data. 1998.

Appendix 1 4 ;
Mean Y a l u e u a t P r e - h a r v e s t and P o s t - h a r v e s t P e r i o d s of N e t
P r o f i t Margin Items of O.5Ha P l o t as a t December 31,

Year

t-Test: P a i r e d Two Sample

f on Means :

Me an
Variance
Obaervak i o n s
Pearson C o r r e l a t i o n
H y p o t h e s i z e d Mean
Difference
df
t Stat

. --
.Source: Calculated from held data, 1998.
 150
Appendix 1 5 :
Haan V a l u e s , a t P r e - h a r v e s t and POS t - h a r v e s t p e r i o d s o f
O p e r a t i n g R , a t i o Items of 0 . 5 Ha P l o t as a t December 31,

P o st-harvas t

t-Testr Paired
Two S a m p l e for
Means;

Pos t - h a r v e s t

M e an
Variance
Observations
Pearnon C o r r a l a ti o n
Hypothesized D i f f e r e n c e
df
t Stat

, source: Cajq+lated from field data, 1998.

Mean Values at Pre-harvest and Post-harvest period8 of
Return on owner's Equity Items of 0 , 5 H a as at December 31,

t-tes t t
Paired Two
Sample for
Means ;
4

Pos t-harvest

Me an
Variance
Observat ion8
Pearson Correlation
Hypothesized Mean
Difference
df
t Stat