You are required to analyse and interpret the above ratios using the theoretical concepts introduced in this subject to evaluate the company’s operations and performance. Then, upon collecting observations from the last 3–5 years and industry aggregates, answer the following:
1.Based on a trend analysis, elaborate on whether the company you have chosen is improving or deteriorating in terms of its liquidity and profitability ratios, highlighting any areas (and appropriate actions) for improvement.
2.How does the company compare to its peers, i.e. benchmarking? Comparison can be done from the industry- averages (or else, to those from its main competitor)? Would there be any issues of concern and, if so, how to address them?
3.Is it possible to identify any relationship between liquidity and profitability ratios? Which is more important for the survival of the company in long run as well as short run?
4.Calculate ‘Operating cycle’ and ‘Cash cycle’ of your selected manufacturing company. How does understanding of all the elements of the operating and cash cycle help in managing working capital efficiently.
The Thermo Electron Australian Pty Limited Company’s trend analysis for the year 2014-17 was done by using certain key liquidity and profitability ratios. The liquidity ratio is calculated with the help of the current ratio and quick ratio of the company. The profitability ratio is calculated with the help of the Return on Equity and Return on Assets for the company (Mun 2015). The performance of the company was reviewed in brief in accordance to the performance of the company among its peer. The selected benchmark for the comparison purpose is the Industry average from the year 2012-17. The key issue of concern arising from the same is the crucial aspect for the company. The importance of the liquidity ratio is there in the short run of the business course while in the long term profitability plays a crucial role for the growth of the company (Khaldun and Muda 2014).Liquidity and Profitability Ratios
The liquidity and the profitability ratio for the company has been volatile in the trend period. The liquidity ratio explains the proportion of the current assets of the company which can service the current liabilities of the company. The industry wide best measure for liquidity in a company is via the use of Current Ratio. The current ratio for the company has been volatile throughout the year the current ratio almost shown a 40% decline from the year 2014 till the year 2017 (Borio, Gambacorta and Hofmann 2017). The ratio showed a movement from 1.4 times in the year 2014 to 0.6 times in the year 2017. The decrease in the current ratio for the company shows that the company is not able to cater its current obligations with the current assets of the company. The company should improve the current assets of the company and decrease the current liability of the company by repaying the loans and borrowing of the company (Durrah et al. 2016).
The profitability ratio on the other hand shows the efficiency of the management of the company in delivering the best possible return on the assets and capital employed. The return is captured by the company in the form of Return on Assets and Return on Equity (Ehiedu 2014). The return on equity for the company has remained sustainable and non-volatile through the trend period. The return on assets for the company on the other hand has shown a massive fall and degradation this shows that the assets of the company were not efficiently used or utilized by the company for the generation of revenue or wealth for the stakeholders of the company. The company should utilize and apply different strategy for efficient utilization of company’s assets by upgrading the technology under, which the company operates (Al Nimer, Warrad and Al Omari 2015).
The company Thermo Electron Australia Ply Limited has performed extremely well and shown an outperforming return when the same is mapped with the benchmark industry average. The revenue for the company on an overall basis has shown significant growth when the industry or the benchmark has delivered negative returns. The EBITDA margin the key aspect of determining the company primary operations margin has shown a considerable amount of increase. The EBITDA margin for the company was around 49.2% while the same for the benchmark return in the average period was around -27.1%. The return on shareholders’ equity of the company has seen static behaviour during the trend period. The total assets of the company on the net has shown a slight improvement but a better view from the benchmark of the company. If we see there seems no concern when the same financial performance is marked to the average benchmark. On a standalone basis the company’s financial may be questionable as the volatility disparity is huge. The employee base of the company is changing at a rapid base, which may act as a concern for the company (Wolfson 2017).
The key factor analysis for the company is done by the use of liquidity and profitability ratios. The liquidity and the profitability ratio for the company is somewhat related to each other indirectly. The liquidity ratio say that the company should maintain sufficient amount of liquid current assets to service its current obligations/liabilities of the company. Whereas the excessive grouping and mapping/allocation of company assets and resources to these current assets could affect the profitability of the company. The assets or the amount of resources if allocated to the liquid assets of the company may hinder the growth or investment opportunity of the company (Chiaramonte and Casu 2017). The profitability of the company is dependent on the investment opportunity and investment returns the company provide. The company should allocate an adequate amount of investment and resources to the company current assets in order to see that the company does not miss with the investment opportunity, which it could have achieved if an adequate amount of resources are allocated to each asset class (Goldmann 2017).
The liquidity and the profitability both plays an important and crucial role in the company’s overview. The liquidity plays an important role in the short run of the company’s operations which ensures that the daily operations of the company. The current liability of the company should be catered efficiently and in a timely manner in order to retain the goodwill and credibility of the company. The profitability ratio of the company plays an important role in the long run of company’s performance. The profitability ratio shows the return the company generates for the stakeholders and the investors of the companies. It is essential for the management of the company to deliver outperforming returns to the investors of the company in the long term (Khan and Ali 2016).
Key Factor Analysis
The operating cycle is that total time which the company takes on an average for making the initial outlaying or giving money for the production of goods and services, selling the goods and services and then receiving of the monetary benefits from the same in exchange of the goods and services provided to the customers (Wang et al. 2014).
The cash cycle for the company shows the efficiency of the company in the conversion of its cash from the various primary sources of business which starts with the procurement and payments for the raw material of the company to the end usage that is receiving the money from the accounts receivable of the company. The efficiency of the company is reflected by the cash conversion cycle of the company and shows whether the assets deployed are getting fixed to a particular component or is it moving fast across the cash conversion cycle (Hribar and Yehuda 2015).
The Thermo Electron Australia Pty Limited Company’s liquidity ratio has not shown a significant amount of consideration, which the company should provide in order to cater and service the current liabilities of the company. The company should be able to meet its liquidity and profitability measure on the contrary side which would enhance the company’s growth in the long term future. There was a comparison between the liquidity and profitability ratio for the company which shows that the company should try to maintain the same for uninterrupted services of its business. The operating cycle and the cash cycle were some of the key factors discussed in the assignment, which stated that company should have efficient and active way of cash conversion cycle among the different components of the financials.
Al Nimer, M., Warrad, L. and Al Omari, R., 2015. The impact of liquidity on Jordanian banks profitability through return on assets. European Journal of Business and Management, 7(7), pp.229-232.
Borio, C., Gambacorta, L. and Hofmann, B., 2017. The influence of monetary policy on bank profitability. International Finance, 20(1), pp.48-63.
Chiaramonte, L. and Casu, B., 2017. Capital and liquidity ratios and financial distress. Evidence from the European banking industry. The British Accounting Review, 49(2), pp.138-161.
Durrah, O., Rahman, A.A.A., Jamil, S.A. and Ghafeer, N.A., 2016. Exploring the relationship between liquidity ratios and indicators of financial performance: An analytical study on food industrial companies listed in Amman Bursa. International Journal of Economics and Financial Issues, 6(2), pp.435-441.
Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: the financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.
Goldmann, K., 2017. Financial liquidity and profitability management in practice of polish business. In Financial Environment and Business Development (pp. 103-112). Springer, Cham.
Hribar, P. and Yehuda, N., 2015. The mispricing of cash flows and accruals at different life?cycle stages. Contemporary Accounting Research, 32(3), pp.1053-1072.
Khaldun, K.I. and Muda, I., 2014. THE INFLUENCE OF PROFITABILITY AND LIQUIDITY RATIOS ON THE GROWTH OF PROFIT OF MANUFACTURING COMPANIES A STUDY OF FOOD AND BEVERAGES SECTOR COMPANIES LISTED ON INDONESIA STOCK EXCHANGE (PERIOD 2010-2012).
Khan, R.A. and Ali, M., 2016. Impact of Liquidity on Profitability of Commercial Banks in Pakistan: An Analysis on Banking Sector in Pakistan. Global Journal of Management And Business Research.
Mun, J., 2015. System and method for modeling and quantifying regulatory capital, key risk indicators, probability of default, exposure at default, loss given default, liquidity ratios, and value at risk, within the areas of asset liability management, credit risk, market risk, operational risk, and liquidity risk for banks. U.S. Patent Application 14/547,225.
Wang, Y., Ji, Y., Chen, X. and Song, C., 2014. Inflation, operating cycle, and cash holdings. China Journal of Accounting Research, 7(4), pp.263-276.
Wolfson, M.H., 2017. Financial crises: Understanding the postwar US experience. Routledge.
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