FBL5030 Fundamentals of Value Creation: Liquidity Analysis Report

This report conducts a comprehensive liquidity analysis of Woodside Petroleum Limited and Santos Limited, focusing on their financial performance through ratio analysis. The study begins with an executive summary and table of contents, followed by an introduction to liquidity and its measurement ...Read More

Running head: FUNDAMENTAL OF VALUE CREATION IN BUSINESS
Fundamental of value creation in business
Name of the Student:
Name of the University:
Author’s Note:

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FUNDAMENTAL OF VALUE CREATION IN BUSINESS
Executive Summary
The study sheds light on the liquid position for Woodside petroleum limited and Santos
Limited. The study has provided idea on the liquidity through the liquidity ratio analysis. This
has introduced the liquidity analysis into the financing process. Further, the study has
provided idea on the liquidity analysis through comparing both the company. The
performance has been analysed and the investment opportunity for both of the companies
have been evaluated through Current ratio, Quick ratio and DSO ratio (Days sales
outstanding) ratio calculation.

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Table of Contents
Introduction................................................................................................................................3
Liquidity.....................................................................................................................................3
Liquidity ratios.......................................................................................................................3
Company’s Ratio analysis..........................................................................................................5
Current ratio analysis.............................................................................................................5
Quick ratio..............................................................................................................................5
Days sales outstanding (DSO) ratio.......................................................................................6
Conclusion..................................................................................................................................6
References..................................................................................................................................7
Appendices.................................................................................................................................9

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Introduction
Liquidity ratio refers to the liquidity position of a company. This includes the cash
and all assets items in the financial statement which can be converted quickly into the cash.
This includes the liquidity ratio which measures a company’s liquidity position and
investment opportunity. For the better understanding of the liquidity, few companies have
been taken for the analysis. This includes their performance analysis in terms of liquidity
position and investment opportunity. The liquidity ratio analysis includes the analysis of the
quick ratio, current ratio and the days of sales ratio. Lastly, the liquidity position has been
analysed through comparing different company’s financial position.
Liquidity
The liquid assets includes the cash and cash equivalent and receivables. Cash refers as
the most liquid assets compared to any other liquid assets present into the balance sheet of the
company. The liquid assets are invested to meet the short term obligations. However, the rest
of the cash equivalent items are also considered as the liquid item (Van den End,
2016).Analysis of the liquidity position has been done through calculating some liquid ratios.
This includes measurement through quick assets ratio, current ratio, Days outstanding ratio
analysis.
Liquidity ratios
Current ratio
Primarily the liquidity ratio includes the analysis of current ratio. The current ratio
shows us the measurement of the current assets in respect to the current liability. This has
been measured to understand the presence of current assets to meet the current liability into
the company (Al Nimer, Warrad& Al Omari, 2015). The current assets refers to the assets
which are used on a daily basis to run the business. These are used as working capital for the

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company to run the daily operations. The current liability refers to the short term obligation
that the company generates daily throughout the business operation. Generally, the current
ratio requires to be in between 1:2 (Chiaramonte&Casu, 2017).The current ratio has been
calculated through:
Current assets/ current liability
Quick ratio
The quick ratio has been another type of liquid ratio where the analysis has been done
to understand the company’s ability to mitigate the current liabilities through using cash and
cash equivalents. This is also known as the acid test ratio. A normal quick ratio has been
considered at 1:1. This indicates that the higher the ratio is the higher the company’s liquidity
position is (Serafim et al., 2018). The quick ratio has been calculated through:
(Cash and cash equivalent + marketable securities+ Account receivables)/current
liabilities.
Days sales out-standing ratio (DSO)
This liquidity ratio is connected with the credit sales and receivables. This measures
the average number of days that a company takes to collect payment after it makes a sales.
The more the number of days a company takes to collect their cash/payment are the more the
possibility of losing liquidity position. With the higher ratio this means the company is taking
longer period of time to collect payment (Vintilă&Nenu, 2016). This ratio indicates towards
the liquidity and efficiency of a company’s collections department.
This has been calculated through: Average receivables / revenue per day.

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Company’s Ratio analysis
A ratio analysis has been done for the Woodside petroleum limited and Santos
Limited. For the understanding of the liquidity position current ratio, quick ratio and the DOS
ratio an evaluation of their performance has been done below.
Current ratio analysis
This has been recognised that the current ratio has decreased over the years due to
reduction into the current assets (Anwar, Fathoni, &Gagah, 2018). This has been recognised
that instead of increase in cash, rest of the current assets have decreased over the year. This
has resulted in reduction in the current ratio of the Woodside petroleum limited. On the other
hand, this has been recognised that the Santos Limited has been increased with their current
ratio compared to their competitor. Due to the increase in the current assets compared to the
current liability the current ratio has increased higher than Woodside petroleum limited
(Refer to appendix 1).
Quick ratio
The quick ratio has been seen to be decreased for the Santos Limited over the year
due to the increase in the current liabilities. From this information this can be recognised that
that the company is unable to meet their short term obligations as the company has generated
lesser number of cash and cash equivalent assets (Fejerskov, Stroescu,&Bredmose, 2016). On
the other side, the similar position of quick ratio has been recognised for the Woodside
petroleum limited. However, the ratio has decreased much higher than that ofSantos Limited.
This has been recognised that the company has realised a reduction into the cash and
investment. This has resulted in reduction into the quick ratio. This has resulted into the
reduction into the liquid position as well. From the comparison can be done in between both
the companies this can be identified that instead of reduction into the quick ratio the rate of

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reduction in quick ratio for Woodside petroleum limited is much slower than the Santos
Limited.
Days sales outstanding (DSO) ratio
This ratio has been calculated to understand the payment period. This has been
recognised that the DOS has reduced over the years for the Santos limited but the reduction is
not better than the Woodside petroleum limited. This is because, this has been recognised that
the collection period for the Woodside petroleum limited is far better than their
competitorwhich has made the liquidity position better for the company. This has been
recognised that for the Woodside petroleum limited they have followed cash sales strategy
and followed instant collection method as a result of which the collection period for them has
reduced over the years (Siekelova et al., 2017). This means that the liquidity and efficiency of
a company’s collections department is effective and maintain the liquidity through effective
collection process.
Conclusion
The study has provided idea on the ratio analysis. However, the ratio analysis has
been done to evaluate the liquidity position of the company. For the measurement of the
liquidity position the study has analysed through the current ratio, quick ratio and DSO ratio.
The study has provided idea on the different liquidity measurement analysis through the
liquidity ratio. Further the study has analysed two company’s performance and compared
their liquidity position through calculating the various types of liquidity ratios. Further, the
liquidity position has been analysed to identify the capability of those company to mitigate
the short term obligations and generated idea on the investment opportunity for those
companies.

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References
Al Nimer, M., Warrad, L., & Al Omari, R. (2015). The impact of liquidity on Jordanian
banks profitability through return on assets. European Journal of Business and
Management, 7(7), 229-232.
Anwar, S., Fathoni, A., &Gagah, E. (2018). ANALYSIS OF THE EFFECT OF CURRENT
RATIO, TOTAL TURN OVER ASSETS, DEBT TO EQUITY RATIO AND NET
PROFIT MAGRIN ON CHANGES OF PROFIT WITH ON EQUITY RETURN AS
INTERVENING VARIABLES ON PHARMACEUTICAL COMPANIES LISTED
IN INDONESIA STOCK EXCHANGE (BEI) 2013-2017 PERIOD. Journal of
Management, 4(4).Schløer, S., Castillo, L. G., Fejerskov, M., Stroescu, E.,
&Bredmose, H. (2016, September). A model for quick load analysis for monopile-
type offshore wind turbine substructures. In Journal of Physics: Conference
Series (Vol. 753, No. 9, p. 092008). IOP Publishing.
Chiaramonte, L., &Casu, B. (2017). Capital and liquidity ratios and financial distress.
Evidence from the European banking industry. The British Accounting Review, 49(2),
138-161.
Serafim, R., Gomes, J. A., Salluh, J., &Póvoa, P. (2018). A comparison of the quick-SOFA
and systemic inflammatory response syndrome criteria for the diagnosis of sepsis and
prediction of mortality: a systematic review and meta-analysis. Chest, 153(3), 646-
655.
Siekelova, A., Kliestik, T., Svabova, L., Androniceanu, A., &Schonfeld, J. (2017).
Receivables management: the importance of financial indicators in assessing the
creditworthiness. Polish Journal of Management Studies, 15.

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Van den End, J. W. (2016). A macroprudential approach to address liquidity risk with the
loan-to-deposit ratio. The European Journal of Finance, 22(3), 237-253.
Vintilă, G., &Nenu, E. A. (2016). Liquidity and profitability analysis on the Romanian listed
companies. Journal of Eastern Europe Research in Business & Economics, 2016, 1-8.

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Appendices
Appendix 1.
12/13 12/14 12/15 12/16 12/17 12/18
0.00
0.50
1.00
1.50
2.00
2.50
Santos limited
Woolside petrolium LTD
Figure 1: Current Ratio analysis of WoolSide petroleum LTD. and Santos LTD.