THE ROLES OF RATIO ANALYSIS IN CREDIT DECISION MAKING

This research project examines the role of financial ratio analysis in credit decision-making within the manufacturing sector, focusing on selected firms in Nigeria. The study aims to evaluate how liquidity, solvency, and profitability ratios influence lenders' assessments of creditworthiness and their subsequent lending decisions. Using a descriptive-analytical research design, secondary data were collected from audited financial statements of five publicly listed manufacturing companies over a five-year period (2018–2022). Key financial ratios, including the current ratio, debt-to-equity ratio, and return on equity, were computed and analyzed to assess their impact on credit access. The findings reveal that liquidity and solvency ratios are prioritized by financial institutions, as they directly reflect a firm's short-term payment capacity and long-term financial stability. Profitability ratios, while secondary, provide critical insights into a company's ability to generate earnings and service debt. Statistical analysis, including Pearson correlation and regression, confirmed the significant influence of these ratios on credit decisions. For instance, firms with strong liquidity (current ratio > 1.5) and low leverage (debt-to-equity ratio < 1.0) were more likely to secure favorable credit terms. The study concludes that financial ratio analysis is an indispensable tool for credit evaluation, though its effectiveness depends on contextual and industry-specific factors. Recommendations include improving liquidity management, optimizing capital structure, and adopting ratio analysis as a proactive financial management tool. This research contributes to the existing literature by highlighting the sector-specific application of financial ratios and offers practical insights for manufacturing firms seeking to enhance their creditworthiness.