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Analyse the overall liquidity position for each of the two companies in 2018 as compared to 2017. Calculate the values for two liquidity ratios to help support your answer and justify why you have chosen these ratios. Note: ensure that you analyse in this question, not just describe the ratio values.

Calculate the Cash Conversion Cycle (CCC) for each of the two companies in 2017 and 2018. Using your answer, analyse the efficiency of each of the two companies in managing their working capital in 2018 as compared to 2017. Note: ensure that you analyse in this question, not just describe the CCC values.

a. Analyse the sources of finance for each of the two companies in 2018 as compared to 2017. Use two capital structure ratios to support your answer and provide an explanation regarding the changes in the composition of the sources of finance for each enterprise. Note: ensure that you analyse in this question, not just describe the ratio values. b. Assume that the average debt ratio for the Capital Goods industry in 2018 was around 50 per cent. What can you infer about each of the two firms’ current capital structure and gearing (leverage) effect in 2018 as compared to the industry average?

Using the DuPont method, analyse the profitability of each of the two companies in 2018 as compared to 2017 from a shareholder’s point of view. Based on your calculations, explain the main reason(s) for the change in the profitability for each company over the two years. Note: ensure that you analyse in this question, not just describe the ratio values.

In light of your analysis in questions 1 to 4, what is your team’s final recommendation to Paramount Investment Fund, with regards to the potential of investing in any of the two firms? Discuss the basis for your recommendation.

Liquidity Position Analysis

The present study is based on a comparative evaluation of NRW Holdings Limited and Reliance Worldwide Corporation Limited by computing their financial ratios and comparing with industry standards. Overview of both the companies is as follows:

NRW Holdings Limited

NRW Holdings is well known for providing the diversified services to the resources, civil infrastructure, energy, and urban development areas. The company is operating with a team of nearly 2000 industry-experienced employees as a civil and mining service provider. Moreover, they have boasted a solid position for carrying up multifaceted projects in a demanding environment (Annual report of NRW Holdings Limited, 2017). NRW Holdings is a group of leading business that supply services like civil construction and mining in Australia as a whole. The Group is composed of Brisbane based civil and mining services business, Golding NRW Civil and Mining based in Perth, Perth based maintenance and manufacturing provider AES Equipment Solutions. Further, the cited company is one of Australia’s largest drill and blast companies.

The liquidity ratio assists the company to evaluate the liquidity position so that the company can determine its capacity for the payment of the long-term debt obligation as well as the short-term debt obligation. There are many types of liquidity ratio, by which the company can ascertain the liquidity position. Among the various ration, in this current study ratio and the quick ratio has been considered to evaluate the overall liquidity position of the company (Wahlen, Baginski, and Bradshaw, 2014).

Current ratio determines whether the company can meet its short-term obligation of the debt as-as when they arise. In other words, through the current ratio company can evaluate about its resources and whether the resources are sufficient for the payment of the short-term liability of the company (Yu, & et al. 2014).

The quick ratio, which is also known as the acid test ratio, measures the company’s capacity to pay off its short-term debt in a more comprehensive manner. It determines how fast the resources of the company can meet its current liability.

Calculation of the liquidity ratio of NRW Holdings Limited

Amount In Million $

Particulars

Formula

2018

2017

Current Ratio

Current Assets/Current Liabilities

Current Assets

206.631

116.098

Current Liabilities

186.035

83.206

Current Ratio

1.11

1.39

Quick Ratio

Current Assets-Inventory/Current Liabilities

Current Assets-Inventory

184.154

99.81

Quick Ratio

0.99

1.19

Calculation of the liquidity ratio of Reliance Worldwide Corporation Limited

Amount In Million $

Particulars

Formula

2018

2017

Current Ratio

Current Assets/Current Liabilities

Current Assets

702.594

312.737

Current Liabilities

180.666

117.902

Current Ratio

3.88

2.65

Quick Ratio

Current Assets-Inventory/Current Liabilities

Current Assets-Inventory

499.954

151.494

Quick Ratio

2.77

1.28

From the above analysis, it has been seen that the current ratios of both the companies is greater than one; it means that the liquidity position of the company is good and company can meet its short-term liability as when the liability arises. However, the current ratio of reliance worldwide corporation is much higher than as compared with the NRW holdings limited, which shows that the RWC Company was not using its current asset in an effective manner.

Further, the quick ratio of the NRW holdings limited in the year 2018 was less than as compared with the year 2018. It means that the company for payment of the current liability depends on the inventory (Annual report of NRW Holdings Limited, 2018). Moreover, the quick ratio of the RWC Company was also significantly higher as compared with the NRW holding limited. Although the high quick ratio indicates the good liquidity position of the company, but on the other hand too much high quick ratio indicates that the company was not using its short-term asset in a better manner.

NRW Holdings Limited Liquidity Ratio Calculation

From the above analysis, it can be concluded that the liquidity position of both the companies is good however the RWC company is much liquid as compared with the NRW holdings limited. On the basis of this, it is also observed that the RWC Company was not utilizing its current asset in an effective manner (Annual report of Reliance Worldwide Corporation Limited, 2018).

Cash conversion cycle ascertains about the management of the working capital of the company. Through the cash conversion, Cycle Company can determine the gap between the purchase of the inventory and the receipt from the debtors of the company (Marlin, and Geiger,2015).

The formula for cash conversion cycle= Inventory turnover ratio in days+ Receivable turnover ratio in days- payable turnover ratio in days

Calculation of the cash conversion cycle for NRW Holdings Limited

Amount In Million $

Particulars

Formula

2018

2017

Inventory Turnover Ratio

Cost Of Sales/ Average Inventory

Average Inventory

Opening Stock +Closing Inventory/2

Cost Of Sales

116.374

48.112

Opening Inventory

16.288

16.538

Closing Inventory

22.477

16.288

Average Inventory

19.3825

16.413

Inventory Turnover Ratio

6.004076

2.931334917

In Days

61

125

Receivable Turnover Ratio

Credit Sales/ Average Account Receivables

Average Account Receivables

Opening Debtors +Closing Debtors/2

Credit Sales

685.431

344.56

Opening Trade Receivables

53.034

36.507

Closing Trade Receivables

120.699

53.034

Average Account Receivables

86.86

44.77

Receivable Turnover Ratio

7.89

7.69

In Days

46

47

Payable Ratio

Cost Of Sales/ Average Account Payable

Average Account Payable

Opening Creditors +Closing Creditors/2

Opening Trade Payables

52.026

44.405

Closing Trade Payables

127.73

52.026

Average Account Payables

89.88

48.21

Payable Ratio

1.2948

0.99

In Days

282

366

Cash conversion cycle for the year 2018= 61+46-282

                                                          = -175 Days

Cash conversion cycle for the year 2017= 125+47-366

                                                          = -194 Days

Calculation of the cash conversion cycle for Reliance Worldwide corporations limited

Amount In Million $

Particulars

Formula

2018

2017

Inventory Turnover Ratio

Cost Of Sales/ Average Inventory

Average Inventory

Opening Stock +Closing Inventory/2

Cost Of Sales

452.413

349.471

Opening Inventory

161.243

119.109

Closing Inventory

202.64

161.24

Average Inventory

181.94

140.17

Inventory Turnover Ratio

2.49

2.49

In Days

147

147

Receivable Turnover Ratio

Credit Sales/ Average Account Receivables

Average Account Receivables

Opening Debtors +Closing Debtors/2

Credit Sales

769.38

601.693

Opening Trade Receivables

109.727

94.964

Closing Trade Receivables

204.92

109.73

Average Account Receivables

157.32

102.34

Receivable Turnover Ratio

4.89

5.88

In Days

75

62

Payable Ratio

Cost Of Sales/ Average Account Payable

Average Account Payable

Opening Creditors +Closing Creditors/2

Opening Trade Payables

97.91

64.76

Closing Trade Payables

167.68

97.91

Average Account Payables

132.79

81.34

Payable Ratio

3.41

4.3

In Days

107

85

Cash conversion cycle for the year 2018= 147+75-107

                                                          = 115 Days

Cash conversion cycle for the year 2017= 147+62-85

                                                          = 124 Days

On the basis of the above calculation, it has been observed that in the case of NRW holdings limited in both the year, the cash conversion cycle was negative. A negative cash conversion cycle provides an indication that the company receipt by the debtors of the company was much earlier than the payment by the company to its suppliers (Annual report of NRW Holdings Limited, 2017). It means that the company is financing its activities of the business through the credit taken from the supplier. It is good for the company, as the company financing its activities as an interest-free rate by borrowing through the supplier.

On the other hand, in the case of the RWC Company cash conversion cycle was positive. However, the conversion period in the year 2018 was less than as compared with the year 2017 (Annual report of Reliance Worldwide Corporation Limited, 2018). The period of the cash conversion cycle in the year 2018 was 115 days, which indicates that the company takes 115 days to convert its inventory into cash.

  • The position of the debt and equity of  NRW Holding Limited

2018

2017

Total Equity

 $ 272.643 M

$ 199.073 M

Total Debt

$247.544 M

$132.493 M

  • The position of the debt and equity of  Reliance Worldwide Corporation Limited

2018

2017

Total Equity

 $ 1324.019M

$ 204.746 M

Total Debt

$861.925 M

$395.041M

Capital structure ratio- for analysing the capital structure of the company, debt-equity ratio and the interest coverage ratio has been considered.

Calculation of the ratio of NRW Holding Limited

Amount In Million $

Particulars

Formula

2018

2017

Debt to Equity Ratio

Debt/ Equity

Debt

247.544

132.493

Equity

272.643

199.073

Total

520.187

331.566

% of debt

0.4758

0.3996

% of equity

0.5242

0.6004

Debt to Equity Ratio

0.91

0.66

Interest Coverage ratio

Earnings before interest and tax/ Interest Expenses

Earnings before interest and tax

42.944

29.26

Interest Expenses

6.869

5.733

Interest Coverage ratio

6.25

5.10

  • Earnings before interest and tax are calculated by adding the finance cost in the profit before tax.

For the year 2018= 36.075+6.869=42.944

For the year 2017=23.527+5.733= 29.26

Calculation of the ratio of Reliance Worldwide Corporation Limited

Amount In Million $

Particulars

Formula

2018

2017

Debt to Equity Ratio

Debt/ Equity

Debt

861.925

395.041

Equity

1324.019

204.746

Total

2185.944

599.787

% of debt

0.3943

0.6586

% of equity

0.6057

0.3414

Debt to Equity Ratio

0.65

1.92

Interest Coverage ratio

Earnings before interest and tax/ Interest Expenses

Earnings before interest and tax

111.1

101.298

Interest Expenses

11.911

5.061

Interest Coverage ratio

9.33

20.01

  • Earnings before interest and tax are the operating profit of the company.

On the basis of the above analysis, it has been observed that, in the case of the NRW holdings limited both the debt-equity ratio and interest coverage ratio was more as compared with the year 2017. It indicates that the company was managing its business activities by the external source of finance. In the year 2018, the company through the debt funding acquired the asset (Annual report of NRW Holdings Limited, 2018).

On the other hand, in case of RWC Company, was moving towards to facilitate business activities through the internal source of finance as the proportion of the debt and the interest coverage ratio in the year 2018 was less than as compared with the year 2017 (Annual report of Reliance Worldwide Corporation Limited, 2017). Along with this in the year 2018, the equity portion was significantly more than as compared with the year 2017.

Reliance Worldwide Corporation Limited Liquidity Ratio Calculation

The average debt ratio of the industry in the year 2018 was 50%. The debt ratio of the NRW holdings limited and the RWC company, in the year 2018 was .91 and .65 respectively. It has been seen that the normally the capital structure of the industry comprises with the equal debt and equal equity. However both the companies followed the different strategy in their capital structure and in the capital structure of the NRW debt position was more than as compared with the RWC Company.

 DuPont Method is the analysis, which breaks the return on equity into the three parts. It calculates return on equity by considering the net margin, asset turnover ratio and the equity multiplier (Ardalan, 2017).  The net profit margin indicates return on the basis of the total revenue of the company, asset turnover ratio ascertain the efficiency of the company for enhancing the revenue of the company and the equity multiplier measure the debt capital structure of the company, by comparing the total asset of the company with the shareholders equity (Valickova,, Havranek, and Horvath, 2015).

ROE (DuPont formula) = (Net profit / Revenue) * (Revenue / Total assets) * (Total assets / Equity) = Net profit margin * Asset Turnover * Financial leverage

Calculation of the ROE of NRW Holding Limited

Particulars

2018 (amount in $M)

2017(amount in $M)

Net Profit

42.166

28.527

Revenue

685.431

344.560

Total Asset

520.187

331.566

Equity

272.643

199.073

ROE

.15

.14

  • ROE= (42.166/685.431)*(685.431/520.187)*(520.187/272.643)

        = .06*1.32*1.91

        =.15

  • ROE=(28.527/344.560)*(344.560/331.566)*(331.566/199.073)

      =.08*1.04*1.67

      =.14

Calculation of the ROE of RWC Limited

Particulars

2018 (amount in $M)

2017(amount in $M)

Net Profit

75.101

64.103

Revenue

769.380

601.693

Total Asset

2185.944

599.787

Equity

1324.019

204.746

ROE

.06

.31

  • ROE= (75.101/769.380)*(769.380/2185.944)*(2185.944/1324.019)

       =0.1*.35*1.65

       =.06

  • ROE= (64.103/601.693)*(601.693/599.787)*(599.787/204.746)

       =.11*1*2.93

       = .31

The above profitability of the companies is computed by the DuPont analysis. The profitability of the NRW holding limited was constant. In the year 2018, there is a slight increase in the net profit ratio. However, the asset turnover ratio of the company increased in the year 2018, which indicates good asset utilization by the company.

In the case, RWC limited the performance of the company was not good on the basis of the profitability analysis. All the ratios in the year 2018 were less than as compared with the year 2018.

On the basis of the above evaluation, it has been evaluated that overall the performance of the RWC company was not as good as compare with the NRW holding limited. It will be recommended to the investors to invest in the NRW holding limited, due to the good financial performance of the company.

References 

Annual report of NRW Holdings Limited, 2017. [Pdf]. Available through <https://nrw.com.au/wp-content/uploads/2017/10/NRW-Holdings-Annual-Report-FY17-Digital-LowRes.pdf>. [Accessed on 18th October 2018].

Annual report of NRW Holdings Limited, 2018. [Pdf]. Available through < https://nrw.com.au/wp-content/uploads/2018/08/FY18-Full-Year-Statutory-Accounts.pdf>. [Accessed on 18th October 2018].

Annual report of Reliance Worldwide Corporation Limited, 2018. [Pdf]. Available through <https://www.rwc.com/wp-content/uploads/2018/09/2018-Annual-Report-for-release-to-ASX.pdf>. [Accessed on 18th October 2018].

Annual report of Reliance Worldwide Corporation Limited, 2018. [Pdf]. Available through <https://www.rwc.com/wp-content/uploads/2017/09/2017-Annual-Report-FINAL-small.pdf>. [Accessed on 18th October 2018].

Ardalan, K., 2017. Advancing the Interpretation of the Du Pont Equation. Journal of Modern Accounting and Auditing, 13(7), pp.294-298.

Marlin, D. and Geiger, S.W., 2015. A reexamination of the organizational slack and innovation relationship. Journal of Business Research, 68(12), pp.2683-2690.

Valickova, P., Havranek, T. and Horvath, R., 2015. Financial development and economic growth: A meta?analysis. Journal of Economic Surveys, 29(3), pp.506-526.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.

Yu, Q., Miche, Y., Séverin, E. and Lendasse, A., 2014. Bankruptcy prediction using extreme learning machine and financial expertise. Neurocomputing, 128, pp.296-302.

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