Analysis of Liquidity, Cash Conversion Cycle, Capital Structure and ROE of NRW Holdings Limited and Reliance Worldwide Corporation Limited

Companies Chosen
The companies that have chosen for analysis encompasses:
(a) NRW Holdings Limited;
(b) Reliance World Wide Corporation Limited.
Introduction
NRW Holdings Limited is an Australian Listed entity. It is a holding company and is engaged in
providing services of diversified nature and infrastructure in Australia. The company has business in
three segments mainly Civil and mining, Drill and Blast, AES Equipment Solutions. The last traded
price on 10-10-2018 is AUD 1.95. (Reuters.com, 2018)
Reliance WorldWide Corporation is an Australian listed entity that is engage in designing,
manufacturing and supplying water flow products for the purpose of wall plumbing. The last traded
price on 10-10-2018 is AUD 4.87. (Reuters.com, 2018)
Answer to Question 1
The two ratios that have been chosen for analysis of the liquidity position of the two companies are
current ratio and quick ratio. These are the two famous ratios used for the purpose of analysing the
liquidity position of the company. The ratios shows whether the company is able to manage its day-
to-day affair in a smooth manner.
Current ratio shows the excess of current asset over current liability of the company. The idle ratio is
2. It measures the company capacity to repay short term debts and obligations. The ratio includes
both liquid and non-liquid investment for the purpose of computation. Further, the ratio greater
than 3 is not good as it shows an excess of current asset over liability and not idle. (CFI Education
Inc., 2018)
Current Ratio= Current Asset/Current liability
Quick Ratio measures the short term liquidity of the company and the capacity of the company to
repay its short term liability with the available liquid funds. It is computed by taking liquid assets like
cash and cash equivalent, marketable securities, account receivable and dividing the same by overall
current liabilities. The idle quick ratio is 1. (InvestingAnswers, Inc, 2018)
For NRW Holdings Limited and Reliance World Wide Corporation Limited, the computed table has
been provided here-in-below:
NRW Holdings Limited
Particulars
Current Asset
(A) Quick Asset (B)
Current Liability
(C)
Current
Ratio (D)
Quick
Ratio (E)
30-06-2017 11,60,98,000.00 9,98,10,000.00 8,32,06,000.00 1.40 1.20
30-06-2018 20,66,13,000.00 18,41,36,000.00 18,60,35,000.00 1.11 0.99

Reliance Worldwide Corporation
Particulars
Current Asset
(A) Quick Asset (B)
Current Liability
(C)
Current
Ratio (D)
Quick Ratio
(E)
30-06-2017 31,39,16,000.00 15,14,94,000.00 11,79,02,000.00 2.66 1.28
30-06-2018 70,25,94,000.00 49,99,54,000.00 18,06,66,000.00 3.89 2.77
On perusal of the above, it may be seen that the current ratio of NRW Holding Limited is less than
threshold and is not good. Further, the same has fallen compared to previous year. Further, liquid
ratio has also fallen over previous year. However, the same was idle in 30-06-2017 and has fallen
below idle ratio in the present year accounts. The quick ratio less than 1 symbolise that the company
does not have sufficient liquid funds to pay off the liabilities. Further, it can be seen that the ratio
has declined over the year on account of drastic increase in current liability of the organisation by
more than 100% with not an equal increase in current asset of the organisation. The same happens
with quick asset of the organisation. The current asset has undergone an increase on account of
increase in receivable by a sharp margin while under current liabilities total payable has undergone
100% increase.
The same shall have impact on the future payment of the corporation as the quick ratio is below one
symbolising 99 pence for $ 1 liability. The company shall try to increase the same.
For Reliance World Wide Corporation, it may be seen that there has been drastic improvement over
the previous year and the current ratio is greater than 3 and symbolise that company has much
excess resource while the quick ratio is also very high symbolising excessive liquid funds. However,
Reliance World Wide Corporation is better off compared to NRW Holdings Limited. The ratio has
improved over the past year on account of the following reasons:
(a) Increase in cash reserve by 8 times;
(b) Increase in receivables by 100%;
(c) Increase in inventory by 25% approx.;
(d) Fall in short term debt.
The company has much idle cash in its balance sheet symbolising strong liquidity. The same can be
seen as an opportunity to explore business expansion and bargaining power.
Answer to Question 2
Cash Conversion Cycle is an accounting tool to gauge the effectiveness of the company to manage
the working capital. The cycle symbolise the speed with which company can convert its cash in hand
to inventory , sale the inventory, receive the payment and make payment. (Timothy P. Connolly,
2018)The formula of Cash conversion Cycle has been described here-in-below:
Cash Conversion Cycle= Day Inventory Outstanding+Day Sales Outstanding+ Days Payable
Outstanding
NRW HOLDINGS LIMITED
Particulars
Day Inventory
Outstanding
Day Sales
Outstanding
Day Payable
Outstanding
Cash Conversion
Cycle
30-06-
2017 99 44 291 -148

Particulars
Day Inventory
Outstanding
Day Sales
Outstanding
Day Payable
Outstanding
Cash Conversion
Cycle
30-06-
2018 40 46 180 -93
RELIANCE WORLDWIDE CORPORATION
Particulars
Day Inventory
Outstanding
Day Sales
Outstanding
Day Payable
Outstanding
Cash Conversion
Cycle
30-06-2017 147 62 76 134
30-06-2018 147 75 98 124
On perusal of the above, it can be seen that NRW Holdings Limited has a negative cash conversion
cycle on account of delayed payment to creditors of the company. Hence, the requirement of
working capital is sufficiently answered.
Since NRW holding cash cycles has been negative for two year, it can be inferred that payment to
creditors has been very slow and company is trying to improve the same. This is a positive point for
the company and the same justifies the low current ratio and quick ratio for the company. In
addition to above, NRW CCC has reduced drastically over year to year on account of quick payment
to Creditors.
The above shall have positive impact on the financial position of the company. However, excess
liability impacts the financial liquidity of the company.
Further, as far as Reliance Worldwide Corporation is concerned, it has a cash conversion cycle very
high which sufficiently explains the high current ratio and liquid ratio of the company. The company
should try to reduce the same. The company has a very high inventory turnover ratio which is
impacting the cash conversion cycle to a large extent. Further, the CCC of the company has improved
over the year in account if increase in payable days.
The above shall have a negative impact on the financial position of the company as the same shall
result in huge piles of cash being blocked in current asset of the company.
Answer to Question 3
The sources of finance for any company is equity and non -current liabilities which generally
comprise of debt and loans. For NRW Holdings Limited, the source of finance encompass Equity and
long term debt while for Reliance Worldwide Corporation the capital structure is too financed by
debt and equity.
The two Capital Structure ratios that have been analysed includes:
(a) Debt to Equity Ratio;
(b) Gearing Ratio.
Debt to Equity Ratio is computed using debt on the numerator and the equity in the denominator.
The same symbolise the proportion of net asset of the company which is funded by the equity and
those funded by debt. An idle ratio is 2:1. Any ratio greater than 2 symbolise heavy reliance on debt