Liquidity Analysis of Reliance Worldwide Corporation Limited and NRW Holdings Limited
1. In this question, Reliance Worldwide Corporation Limited (RWC) and NRW Holdings Limited’s (NWH) financial performance will be analysed for the consecutive financial period of 2019 and 2020. The liquidity position of the companies is judged based on the current and quick ratios.
Understanding Reliance worldwide corporation limited and its liquidity position, the current ratio shows 2.43% in 2020 and 3.78% in 2019. This result reflects that Reliance has failed to maintain its current ratio in the same position after 2019. This also implies that Reliance's short-term applications payable capacity Reliance has been reduced by 1.55%. Reliance was unable to maximise its current assets within the balance sheet system, and due to that, the current dates and other payable options have increased within the organisational structure. In this case, it can be identified that Reliance current ratio has been reduced because of its lack of asset management system and efficiency in the resource management system. On the other hand, the quick ratio shows that 1.54% what's the status value in 2020, whereas it showed 2.18 % in 2019 (Setiany 2021). This result shows that the company has failed to identify its ability to measure the quick assets according to the current assets.
In the case of NRW holdings limited, the current ratio shows a particular efficiency in managing current assets and current liabilities system. The current Assets stood at one point 1.11% in 2019 whereas, by 2020 end of the year, it is standing at 1.19%. The current ratio shows that the company is implementing better management efficiency. The performance in handling and paying off its debts is accurate and improving within the organisation structure. The company will most likely understand its current assets by utilising them as the working capital ratio. With the improvement in the performance, it can be identified that the company has a better opportunity to handle higher risks of distress, and it will be able to manage better assets and debts on both short term and long term basis. The company's quick ratio shows that it has also improvised by 0.11% in 2020, which is providing the company or per hand and improving result in eliminating the long term debts.
2. The cash conversion cycle stands as a metric that expresses the time when the company converts its significant investments into inventory within the cash flow system. The formula for the Cash Conversion cycle stands as “Inventory Days +Accounts Receivables Days) - Accounts Payables Days”.
According to the cash conversion cycle of NWH company, the reference of the cash to purchase are initially identified through cash from sale and inventory. In this particular case, the company shows 242 days that will take an investment to convert into inventory. This particular time is a huge time gap for returning an investment. In 2020 the company will have deteriorated its cash conversion cycle as it shows a time gap of 299 days to convert its investment into inventory (Wang 2019). This provides the idea that the NWH company is taking way too long after considering the accounts receivable sales cost of goods sold in accounts payable to compute the cash conversion cycle. It shows that the NWH company is inefficient enough to manage its working capital and inventory. The company is failing to indicate its efficiency in the cash flow within the business segment. It shows that the efficiency in the cash inflow is more unpredictable, and a cash outflow out of the accounts payable is predicted.
Cash Conversion Cycle Analysis of Reliance Worldwide Corporation Limited and NRW Holdings Limited
On the other hand, the RWC company shows an elevated performance through its Cash Conversion cycle because in 2019, the CCC strands at 20.78 or 21 days to convert its investment into sales and inventory whereas, in 2020, the CCC shows 57.49 days to convert its investment into cash (Chang 2018). The significance of this result reflects that RWC is equally inefficient in managing the cash inflow and outflow of the company. Eventually, the working capital utilisation is failed because the company has failed to generate cash sooner from its investment in 2020 than in 2019. The lack of improvement justifies the lack of cash and working capital control within the organisation over the last two financial years, 2019-2020 (Husna and Satria 2019).
3. According to the analysis of sources of finance for RWC company and NWH company debt ratio and interest coverage ratio has been considered within the question. The two different types of capital structure ratios have been identified to explain the changes in their compositions of sources of finance in each year of 2019 and 2020. The enterprises have been compared within their results in the two financial years.
According to the debt ratio of NWH, it has been identified that the debt ratio is 2019 for the company stood at 50.48%, and in 2020, it stood at 61.28%. This result reflects that the company has increased 10.8% of the total debt compared to equity (Malikov, Coakley and Manson 2019). This demonstrates that the risk has been slowly increasing over the last financial year. The company needs to undertake a better debt management system to reduce risk because it has already gone up on the 50% mark by exceeding the risk parameter. Based on the debt ratio of RWC company, it can be identified that in 2019 the debt ratio stood at 32.26%, and in 2020 the same stood at 35.87% (Baptista et al. 2021). This proves that the company has evolved its debt ratio by 3.61%, increasing its debt compared to its equity. The increase in the debt ratio is continuously increasing the risk for the company to smoothly associate its business, but eventually, it is still safe because the debt ratio is under the 50% mark of risk parameter.
According to the understanding of the interest coverage ratio of the NWH company, the result shows that in 2019 the interest coverage ratio stood at 6.676 times, whereas in 2020, it increased up to 9.612 times. This is a case of a classic decrease in the interest coverage ratio of 2.936 times (Balezentis and Novickyte 2018). This shows that the NWH companies are in a great financial position where they will be able to pay off their interest expenses of outstanding debt due to the inclination in the interest coverage ratio. Here, investors will also be aware that they will pay their debts efficiently and comfortably after profitability. On the other hand, the RWC company had an interest coverage ratio of 9.554 times in 2019, which reduced to 8.926 times. This result provides the idea that the company and its interest coverage ratio has decreased by 0.628 times. The company's ability to pay off its debts has also reduced along with it (Ram and Chouhan 2020). The profitability will be available, but the interest expenses will increase simultaneously—the decrease in the company's interest coverage ratio results in a particular increase in the liabilities. The operating profit will also reduce greatly along with the decrease in the interest coverage ratio.
Debt Ratio and Interest Coverage Ratio Analysis of Reliance Worldwide Corporation Limited and NRW Holdings Limited
4. In this section, the shareholder's point of view will be analysed based on the DuPont method for the financial year of 2019 and 2020. Both the companies will be identified based on their return on equity for the two financial periods.
According to the return on equity of NWH company, it stands at 9.73% in 2019 and 18.77% in 2020. It shows that the organisation can generate 0.0973 dollars for every dollar pending on the equity capital. From the shareholder's point of view, it can be identified that the company is not as successful in 2019 as it was in 2020. This is a solid investment done by the shareholders because, in 2020, the return on equity has improved and increased. One of the significant reasons for the changes in profitability for NWH company is its huge change in the cash generation and amount from 65,03,1000 to 170,22,9000 (Pandansari and Khasanah 2020). In 2019 the company selected a significant area to establish its financial position. In 2020, the company was willing to improve and explore ways to enhance the financial management 6th sem of the investment criteria.
In the case of RWC company, the return on equity is showing 10.76% in 2019 and 8.32% in 2020. In this case, it can be noticed that the RWC company is generating a massive loss throughout the 2020 financial year. The company is taking a high risk as it presents its ability to take losses (Sari 2021). The shareholder's point of view favours investment criteria according to the result of 2019. Significant reasons behind the changes in profitability are the huge retention rate of funds and the purchase of subsidiaries.
5. In 2019 the Reliance Worldwide Corporation Limited company had a better opportunity to pay its current assets without selling its long-term assets. The company's quick assets are owned in comparison to the current liabilities, but eventually, the company is failing to incorporate appropriate asset and liability management systems, due to which it is facing some problems in 2020 (Madushanka and Jathurika 2018). The debt ratio of the RWC company it's standing in a better position than the NWH company. Along with the interest coverage ratio, the shareholders might think that the RWC company would be more profitable in terms of investment.
The NRW Holdings Limited company will be able to identify and eliminate the current dates, and in the future, the long-term debt can also be handled by the company due to the efficiency of the asset management system. The cash conversion cycle is also improved within the RWC rather than the NWH company. This is improving and helping the paramount investment fund make decisions regarding the potential forms (Butzbach 2022). After the analysis of questions 1 to 4, it can be identified that the RWC company might require more time to become profitable, but sustainability and consistency are there within the company structure. The financial management system is also evaluated within the RWC company if the investment firm is looking for a low investment low, risk facility. Otherwise, if the paramount investment fund company is looking for high investment and high risk, then it should go for the option NWH company.
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Butzbach, O., 2022. The elusive nature of shareholders’ claims over the corporation, or the strange non-death of shareholder primacy. In The corporation: Rethinking the iconic form of business organization. Emerald Publishing Limited.
Chang, C.C., 2018. Cash conversion cycle and corporate performance: Global evidence. International Review of Economics & Finance, 56, pp.568-581.
Husna, A. and Satria, I., 2019. Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), p.50.
Madushanka, K.H.I. and Jathurika, M., 2018. The impact of liquidity ratios on profitability. International Research Journal of Advanced Engineering and Science, 3(4), pp.157-161.
Malikov, K., Coakley, J. and Manson, S., 2019. The effect of the interest coverage covenants on classification shifting of revenues. The European Journal of Finance, 25(16), pp.1572-1590.
Pandansari, T. and Khasanah, F.L., 2020. Liquidity Ratio Analysis, Profitability Ratio, Leverage Ratio, And Cash Flow Operations To Predict The Financial Distress In Manufacturing Companies Listed In Indonesia Stock Exchange (2015-2018).
Ram, M. and Chouhan, R.K., 2020. Dupont Analysis–A Tool Of Financial Performance Analysis. Indian Journal of Business Administration, 13(13).
Sari, D.W., 2021. Analysis of the effect of the liquidity ratio on financial performance in. Multi bintang indonesia tbk. International Journal of Global Accounting, Management, Education, and Entrepreneurship, 1(2), pp.78-89.
Setiany, E., 2021. The Effect of Investment, Free Cash Flow, Earnings Management, and Interest Coverage Ratio on Financial Distress. Journal of Social Science, 2(1), pp.67-73.
Wang, B., 2019. The cash conversion cycle spread. Journal of financial economics, 133(2), pp.472-497.
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