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November 28, 2024
One. This analysis will examine the financial performance of Reliance Worldwide Corporation Limited (RWC) and NRW Holdings Limited (NWH) for the consecutive fiscal years of 2019 and 2020. The liquidity status of the company is assessed using the current and quick ratios.
Analyzing Reliance Worldwide Corporation Limited and its liquidity status, the current ratio was 2.43% in 2020 and 3.78% in 2019. This result indicates that Reliance has not maintained its current ratio at the same level since 2019. This indicates that Reliance's ability to pay short-term applications has diminished by 1.55%. Reliance failed to optimize its current assets within the balance sheet framework, resulting in a rise in current liabilities and other payable choices within the organizational structure. The decline in Reliance's current ratio may be attributed to deficiencies in its asset management system and inefficiencies in resource management. Conversely, the quick ratio indicates a value of 1.54% in 2020, compared to 2.18% in 2019 (Setiany 2021). This outcome indicates that the organization has not successfully recognized its capacity to assess fast assets in relation to current assets.
The current ratio of NRW Holdings Limited demonstrates notable efficiency in the management of current assets and current liabilities. The existing assets were 1.11% in 2019 and increased to 1.19% at the end of 2020. The current ratio indicates that the organization is enhancing managerial efficiency. The organization's debt management and repayment performance is precise and enhancing inside its structural framework. The corporation will likely assess its current assets by using them as the working capital ratio. The enhanced performance indicates that the organization is better positioned to manage elevated distress risks and will more effectively oversee assets and liabilities in both the short and long term. The company's quick ratio indicates an improvement of 0.11% in 2020, which aids in mitigating long-term debt.
The cash conversion cycle is a statistic that indicates the duration required for a firm to transform its substantial investments into inventory within the cash flow framework. The formula for the Cash Conversion Cycle is expressed as “Inventory Days + Accounts Receivable Days - Accounts Payable Days.”
The cash conversion cycle of NWH corporation indicates that the cash required for purchases is originally sourced from sales revenue and inventories. The firm indicates that it will take 242 days for an investment to be converted into inventory. This interval represents a significant delay in recouping an investment. In 2020, the corporation will have worsened its cash conversion cycle, exhibiting a duration of 299 days to transform its investment into inventory (Wang 2019). This suggests that NWH corporation is excessively delayed in calculating the cash conversion cycle after accounting for accounts receivable, sales, cost of products sold, and accounts payable. The NWH corporation has significant inefficiency in managing its working capital and inventories. The corporation is not demonstrating its efficiency in cash flow within the business area. The efficiency of cash inflow is more erratic, whereas a cash outflow from accounts payable is anticipated.
Conversely, RWC Company exhibits a superior performance in its Cash Conversion Cycle, as it registered a CCC of 20.78 days in 2019 for converting investments into sales and inventories, but in 2020, the CCC increased to 57.49 days for converting investments into cash (Chang 2018). This result indicates that RWC is equally ineffective in controlling the company's cash inflows and outflows. The use of working capital has failed due to the company's inability to earn cash from its investments in 2020 more promptly than in 2019. The absence of enhancement validates the deficiency in cash and working capital management within the organization throughout the previous two fiscal years, 2019-2020 (Husna and Satria 2019).
3. The examination of financing sources for RWC and NWH companies has taken into account the debt ratio and interest coverage ratio. Two distinct kinds of capital structure ratios have been established to elucidate the variations in their financing sources for the years 2019 and 2020. The firms have been evaluated based on their performance during the two financial years.
The debt ratio of NWH was 50.48% in 2019 and increased to 61.28% in 2020. This outcome indicates that the corporation has increased its overall debt by 10.8% relative to equity (Malikov, Coakley and Manson 2019). This indicates that the risk has gradually escalated during the last financial year. The corporation must implement an improved debt management system to mitigate risk, since it has beyond the 50% threshold of the risk metric. In 2019, RWC company's debt ratio was 32.26%, and in 2020, it increased to 35.87% (Baptista et al. 2021). This demonstrates that the corporation has adjusted its debt ratio by 3.61%, augmenting its debt relative to its equity. The rising debt ratio is consistently elevating the company's operational risk; yet, it remains secure as the debt ratio is below the 50% danger threshold.
The interest coverage ratio for NWH firm was 6.676 times in 2019 and grew to 9.612 times in 2020. This exemplifies a traditional reduction in the interest coverage ratio to 2.936 times (Balezentis and Novickyte 2018). This indicates that the NWH enterprises are in a robust financial position, enabling them to meet their interest expenditures on existing debt, as seen by the increase in the interest coverage ratio. Investors will recognize that they may repay their obligations effectively and comfortably after success. Conversely, the RWC corporation reported an interest coverage ratio of 9.554 times in 2019, which subsequently decreased to 8.926 times. This outcome indicates that the company's interest coverage ratio has decreased by 0.628 times. The company's capacity to pay its obligations has diminished correspondingly (Ram and Chouhan 2020). Profitability will be attainable; nevertheless, interest expenditures will concurrently rise, leading to a decline in the company's interest coverage ratio and a corresponding increase in liabilities. The operational profit will significantly decline with the reduction in the interest coverage ratio.
Four. This section will analyze the shareholder's perspective using the DuPont approach for the fiscal years 2019 and 2020. The firms will be evaluated according to their return on equity for the two financial quarters.
The return on equity for NWH firm was 9.73% in 2019 and 18.77% in 2020. The organization may create $0.0973 for each dollar invested in equity capital. From the shareholder's perspective, it is evident that the company's performance in 2019 was inferior than that of 2020. This is a robust investment made by the shareholders, since the return on equity has enhanced and escalated in 2020. A major factor contributing to the fluctuations in profitability for NWH corporation is the substantial increase in cash creation, rising from 6,503,100 to 17,022,900 (Pandansari and Khasanah 2020). In 2019, the corporation identified a substantial sector to solidify its financial standing. In 2020, the corporation sought to develop and investigate methods to increase the financial management of the investment criterion for the sixth semester.
For RWC firm, the return on equity was 10.76% in 2019 and 8.32% in 2020. The RWC corporation is incurring substantial losses throughout the 2020 financial year. The corporation is assuming significant risk by demonstrating its capacity to incur losses (Sari 2021). The shareholder's perspective supports investment criteria based on the outcomes of 2019. The primary factors influencing the alterations in profitability are the substantial retention rate of cash and the acquisition of subsidiaries.
5. In 2019, Reliance Worldwide Corporation Limited has a superior capacity to liquidate its present liabilities without divesting its long-term assets. The company's liquid assets are owned relative to its present obligations; yet, it is ultimately failing to implement effective asset and liability management systems, resulting in difficulties in 2020 (Madushanka and Jathurika 2018). The debt ratio of RWC Company is more favorable than that of NWH Company. In conjunction with the interest coverage ratio, shareholders may see that RWC Company has more investment profitability.
NRW Holdings Limited will be capable of identifying and eliminating current liabilities, and in the future, it will also manage long-term debt effectively owing to the effectiveness of its asset management system. The cash conversion cycle is enhanced in the RWC compared to the NWH firm. This enhances and assists the principal investment fund in making selections about prospective forms (Butzbach 2022). Analysis of questions 1 to 4 indicates that RWC corporation may need more time to achieve profitability; nonetheless, sustainability and consistency are evident within its organizational framework. The financial management system is assessed inside the RWC organization when the investment firm seeks a low-investment, low-risk option. If the leading investment fund firm seeks substantial investment and elevated risk, it should choose the NWH company alternative.
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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).
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