Financial Management: Liquidity and Profitability Ratios

This project studies the financial overview of Thermo Electron Australia Pty Limited from 2014-17 using liquidity and profitability ratios. The performance of the company is reviewed in the context of its peers. The operating and cash cycle are also discussed.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary
The aim of the project is to study about the financial overview about the Thermo Electron
Australia Pty Limited. The financial data presented for the company from the year 2014-17
helped us review the financial position of the company. The trend analysis for the company
was performed using the ratio analysis. The performance of the company was reviewed in the
context of the other competitors playing in the sector. There was a comparison between the
liquidity and profitability ratio for the company. The operating cycle and the cash cycle were
some of the key factors discussed in the assignment.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Liquidity and Profitability Ratios...........................................................................................3
Performance Review..............................................................................................................4
Key Factor Analysis...............................................................................................................5
Operating and Cash Cycle......................................................................................................6
Conclusion..................................................................................................................................6
Reference....................................................................................................................................7

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Introduction
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).
Discussion
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).

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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).
Performance Review
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).

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Key Factor Analysis
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).

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Operating and Cash Cycle
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).
Conclusion
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.

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Reference
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

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BEVERAGES SECTOR COMPANIES LISTED ON INDONESIA STOCK EXCHANGE (PERIOD 2010-
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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
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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.
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