Financial Performance Analysis: Liquidity Ratios of Two Companies

This report presents a detailed liquidity analysis of two Australian-based companies: CPT Global Limited, an IT consultancy, and CSG Limited, a technology service provider. The analysis focuses on key liquidity ratios, including the current ratio and quick ratio, calculated for the years 2016, 2017, and 2018. The report compares the financial performance of both companies, highlighting differences in their ability to manage short-term obligations. It examines the implications of these ratios, considering factors like inventory and quick assets. The report concludes with recommendations for improving liquidity and financial management for CPT Global Limited, suggesting strategies to enhance their current and quick ratios, and also provides the financial data and ratio calculations in the appendix.

ACCOUNTING

Contents
Introduction...........................................................................................................................................2
Liquidity analysis...................................................................................................................................2
Conclusion.............................................................................................................................................4
References.............................................................................................................................................5
Appendix...............................................................................................................................................6

Introduction
This report brings out an analysis on liquidity ratio of two companies. Liquidity ratios. CSG
limited company is Australian listed owned organisation founded in 2007 in Australia, which
is a technology service provider. It offers a complete portfolio of various technological
solutions in order to maximise the productivity and efficiency when reducing the costs. The
solution includes cloud communications, desktop, display, print, and contact centre. CPT
global limited provides IT consultancy services based in Australia. The company provides IT
and consultancy services to various financial and telecommunication organisations in
Australia, North America, and Europe.
Liquidity analysis
Ratio analysis is a quantitative way in order to get a look inside the liquidity of the company.
It helps the internal as well as external stakeholders to assess the financial state and better
understand current scenario of the organisation. It is a comparative aspect and correlation
between two accounts. It includes the measurement of the profitability through profitability
ratios, conducts evaluation through operational efficiency, ensuring appropriate liquidity and
finally measures overall financial strength. Liquidity ratio analysis is defined as the ability of
the company to pay off its bills on time. This ratio is used to measure the ability of the
organisation to pay off short-term obligations. This can be easily done by comparing two
components. If the organisation fails to pay the debt then it will face bankruptcy.
Most importantly, restructuring activities are detrimental to shareholder`s value. Under the
head of liquidity ratios, it is important to calculate current and quick ratio. Current ratio is the
ratio that is used to determine whether the organisation is able to pay its short-term liabilities,
obligations, and debt (Ponikvar, Kejžar, and Peljhan, 2018). This ratio is inclusive of
inventory. This ratio is important for the lenders and creditors who wants to gain an idea for

financial situation of the borrowers and the customers before granting loan to the
organisation.
This ratio compares the organisation`s current assets to the current liabilities. Mostly it is
considered that high current ratio is good as compared to low current ratio as high current
ratio reflects that good business conditions. While reviewing the financial condition and
liquidity conditions of CPT Global limited, it is seen that the current ratio of the company is
1.05 in 2016, 0.94 in 2017, and 1.02 in 2018. These ratios of all three years reflects that the
liquidity position of CPT global limited is not very good. It is said that an ideal ratio is 2:1
and the current ratio of CPT global limited is less than the ideal ratio. On the other hand, the
current ratio of CST Group limited is more than the ideal ratio. Current ratio of the company
is 18.03 in 2016, 15.3 in 2017, and 17.26 in 2018. This ratio indicates that the organisation is
very much efficient while paying its short-term debt obligations. CST group limited is 18
assets more efficient to pay one liabilities, 15 times more efficient to pay debt obligations and
17 times more efficient in 2018. Finally, the current ratio of CST Group limited is far better
than the CPT Group limited. Therefore, in order to improve the current ratio and liquidity of
the CPT Global Limited, the company has to delay the capital purchases than requires cash
payment, reduce the personal drawings, selling those capital assets, which are not able to
generate any return into the business.
Further, the company can use sweep accounts, which would transfer various funds into the
higher interest rate even when they are not needed. Paying off the current liabilities quickly
will improve the current ratio as it cuts the short-term overhead expenses such as rent,
marketing and labour and increase to deploy shareholder’s fund. Further, in order to improve
liquidity ratio in long term, the company has to look after accounts receivable and payable.
While ensuring that organisation`s current ratio, the company has to ensure that opposite

organisation for longer pay cycle that are more beneficial for the company (Laitinen, and
Laitinen, 2018).
Quick ratio is a measure that undertakes to determine the ability of the company in order to
use cash and other quick assets in order to extinguish the current liabilities. Quick assets
includes the items that can be easily converted into cash. 1:1 quick ratio is considered as ideal
ratio. This ratio is tested to find the viability of the business organisation but this ratio does
not reflect complete picture of organisation`s health. Higher is the ratio, greater is the ability
of the organisation to meet the current obligation by using the liquid assets.
While analysing the quick ratio of CPT Global limited, it is seen that the company does not
operate through any inventory so that current ratio is same as quick ratio (Kowalik, 2018).
The ratio of the CPT Global limited are 1.05 in 2016, 0.94 in 2017, and 1.02 in 2018. On the
other hand, CST Group Limited has the quick ratio of 15.67 in 2016, 15.21 in 2017, and
17.16 in 2018. It indicates that the quick ratio of CPT Global limited needs to improve to
great extent but it is near to ideal ratio but at the same time, while comparing it with CST
Group limited, the quick ratio needs to improve a lot. CPT Global limited can improve its
quick ratio by increasing the sales turnover, which will further increase the cash in hand. The
company can improve its invoice collection period and paying off the liabilities as soon as
possible. It is important to know the reason of decreasing quick ratio are increase in short-
term debt, decrease in current assets, decline in this ratio means reduction in the ability to
generate cash (Jacobson, and Schedvin, 2015).
Conclusion
From the above discussion, t can said that Financial Data of CST Group Limited are quite
managed when it comes to working capital and liquidity as while operating a business, it is
necessary to have appropriate money in hand to operate the business.

References
Jacobson, T. and von Schedvin, E., 2015. Trade credit and the propagation of corporate
failure: an empirical analysis. Econometrica, 83(4), pp.1315-1371.
Kowalik, M., 2018. Profitability and Financial Liquidity of the Chemical Industry
Companies. Finanse, Rynki Finansowe, Ubezpieczenia, (1 (91) Zarządzanie finansami),
pp.47-58.
Laitinen, E.K. and Laitinen, T., 2018. Financial reporting: profitability ratios in the different
stages of life cycle. Archives of Business Research, 6(11).
Ponikvar, N., Kejžar, K.Z. and Peljhan, D., 2018. The role of financial constraints for
alternative firm exit modes. Small Business Economics, 51(1), pp.85-103.

Appendix
Particulars 2016 2017 2018
AUD$ '000 AUD$ '000 AUD$ '000
Current Assets 10,006 8122 8806
Quick Assets 10006 8122 8806
total liabilities 9987 8955 8938
Current Liabilities 9479.0 8631.0 8625
working capital 527.0 -509.0 181.0
Liquidity ratio 2016 2017 2018
Current ratio 1.056 0.941 1.021
Quick ratio 1.056 0.941 1.021
Financial Data of CPT Global limited
Computation of ratio analyis
2016 2017 2018
0.880
0.900
0.920
0.940
0.960
0.980
1.000
1.020
1.040
1.060
1.080
Current ratio

2016 2017 2018
14.000
14.500
15.000
15.500
16.000
16.500
17.000
17.500
18.000
18.500
Current ratio
Financial Data of CST Group Limited
Particulars 2016 2017 2018
AUD$ '000
AUD$
'000 AUD$ '000
Current Assets 8,65,227 644988 587216
quick assets 7,51,890 637571 584057
inventory 113337 7417 3159
total liabilities 66558 62684 61645
Current Liabilities 47969.0 41918.0 34021
working capital 817258.0 603070.0 553195.0
Computation of ratio analysis
Liquidity ratio 2016 2017 2018
Current ratio 18.037 15.387 17.260
Quick ratio 15.674 15.210 17.168
2016 2017 2018
14.000
14.500
15.000
15.500
16.000
16.500
17.000
17.500
Quick ratio