SCHOOL OF Business

GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Zhizhong Huang Student ID number: 19895475

Student name: Eldridge Ampo Student ID number: 20249582

Student name: Khadija Cheema Student ID number: 19405041

Student name: Nasim Billah Student ID number: 20318446

Student name: Student ID number:

UNIT AND TUTORIAL DETAILS

Unit name: Financial enterprises Unit number: BUSM101

Tutorial/Lecture: Lecture Class day and time: 12:30 Monday
Lecturer or Tutor name: Mustapha Bangura
ASSIGNMENT DETAILS

Title: Numerical problem solving

Length: Due date: 21st Jan 2022 Date submitted: 21st Jan 2022
Home campus (where you are enrolled): Town Hall

DECLARATION
I hold a copy of this assignment if the original is lost or damaged.
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current) assessment, except where appropriately referenced, and with prior permission from the Lecturer /
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checking).

Student’s signature: Zhizhong Huang (19895475)

Student’s signature: Eldridge Ampo (20249582)
Student’s signature: Khadija Cheema (19405041)
Student’s signature: Nasim Billah (20318446)
Student’s signature:
Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has not been
signed.

ARO 00398 09/15

Question 1:

RWC: liquidity position in 2019 is strong. Moreover, the current rations in 2020 have a slightly decreased. However,
this is not a problem because the ratios are more than 1, while the quick ratio is also reduced due to the increase in
the total current liability from 2019 to 2020 which means that the level of inventory and RWC became satisfy its
short-term liability payments knowing that the company cannot pay what is owed by inventory (See appendix
question 1). However, the amount of quick ratio from RWC is bigger than one which means the company can have
adequate liquidity to pay its short-term bills.
NWH: liquidity position in 2019 is bad as the company quick ratio is below 1 (see appendix question 1) and it
increased slightly in 2020 it remained relatively the same and the company cannot meet the short-term liabilities
payments. The reason there is not a big change in the quick ratio which causes the company cannot meet the short-
term liabilities payments. The reason why the liquidity ratios are below average which will lead to rise in current
liabilities from 234,854,000 to 506,640,000 as well as the inventory levels knowing that they could not pay what is
owed by inventory.

Appendix question 1
 Current ratio: RWC in 2019: $542,809,000/$143,588,000=3.78

2020: $586,558,000/$241,236,000=2.43

NWH in 2019: $260,096,000/$234,854,000=1.11 2020: $602,810,000/$506,640,000=1.19

Quick ratio: 2019 in RWC: $542,809,000-$229,090,000/$143,588,000=2.18

2020: $586,558,000-$215,450,000/$241,236,000=1.54

NWH: 2019: $260,096,000-$30,581,000/$234,854,000=0.98

2020: $602,810,000-$51,358,000/$506,640,000=1.09

Question 2

A cash conversion cycle (CCC) is a metric that indicates how long it takes a company to convert
investments in inventory and other resources into cash flows from sales. (Sushinsky, 2009)

-NRW Holdings Limited (ASX: NWH)

CCC 2019 = 11.47+53.25-59.19=5.53 days

CCC 2020= 10.68+67.81-68.99=9.5 days

Cash Conversion Cycle calculations show that NRW Holding Limited has increased efficiency in their
working capital from 2019 to 2020. In 2019, inventories are lower than they were in 2020. As a result, their
cash conversion cycle has been reduced indicating inventories of the company are less liquid. Similarly, the
increase in Cost of Goods Sold between 2019 and 2020 shows that they have improved inventory
management and increased productivity. However, these increases can also be the reason for the increase in
inventories so the company can meet the needs. Whereas the increase in receivables had a negative impact
on the company, this can mean the company is selling products on credit and is waiting to be paid. This can
lead to having cash flow problems (Sushinsky, 2009). However, NWH has a higher payable day which
means it takes longer for them to pay its bills, resulting in retaining available funds for a longer period,
allowing it to use those funds more effectively. Consequently, NRW Holdings overall performance has
decreased from 2019 to 2020.

- Reliance Worldwide Corporation Limited (ASW: RWC)

CCC 2019= 98.35+76.30-56.66= 117.99 days

CCC 2020= 85.73+82.54-67.02=101.25 days

Cash conversion cycle calculation shows Reliance Worldwide Corporation Limited has increased efficiency
in their working capital from 2019 to 2020. In 2020 inventories have decrease dramatically, lower
inventories show the company is more liquid and is more efficient. Resulting in potential higher profits.
Similarly, increase in payable shows the company is keeping their funds for a longer period which can be
invested in a short-term investment. This represents the company is using its resources resourcefully,
having a positive impact. Whereas the increase in receivable can have a negative impact on the company,
since the company can’t quickly turn sales into cash, a company does not have the chance to put the cash to
use again more quickly (Sushinsky, 2009). Hence, Reliance Worldwide Corporation Limited overall
performance has increased from 2019 to 2020.

Appendix Question 2

NWH 2019 NWH 2020 RWC 2019 RWC 2020

SALES 1,083,244,000 2,004,673,000 1,111,060,000 1,163,875,000

COST OF 972,877,000 1,754,649,000 850,233,000 917,282,000

GOOD SALES

INVENTORIES 30,581,000 51,358,000 229,090,000 215,450,000

RECEIVABLES 158,039,000 372,452,000 232,256,000 263,205,000

PAYABLE 157,756,000 331,642,000 131,973,000 168,426,000

CCC 5.53 9.5 117.99 101.25

Formulas:
CCC = Inventory Days + A/R Days – A/P Days

Inventory Days = Inventories/Average Daily Cost of Goods Sold

Accounts Receivable Days = Accounts Receivable/Average Daily Sales

Accounts Payable Days = Accounts Payable/Average Daily Cost of Goods Sold

Average daily sales = Sales/365 days

Average cost of goods sold = Cost of Goods sold/365 days

NWH 2019
Average daily sales= 1,083,244,000/365= 2,967,791.781

Average cost of goods sold =972,877,000 /365 days= 2,665,416.438

Inventory Days =30,581,000/2,665,416.438=11.47 days

Accounts Receivable Days =158,039,000/2,967,791.781=53.25 days

Accounts Payable Days =157,756,000/2,665,416.438= 59.19 days

CCC= 11.47+53.25-59.19=5.53 days

NWH 2020
Average daily sales=2,004,673,000 /365= 5,492,254.795

Average cost of goods sold =1,754,649,000/365 days= 4,807,257.534

Inventory Days =51,358,000/4,807,257.534=10.68 days

Accounts Receivable Days =372,452,000/5,492,254.795=67.81 days

Accounts Payable Days = 331,642,000/4,807,257.534=68.99 days

CCC= 10.68+67.81-68.99=9.5 days

RWC 2019
Average daily sales=1,111,060,000 /365= 3,044,000

Average cost of goods sold =850,233,000/365 days= 2,329,405.479

Inventory Days =229,090,000/2,329,405.479=98.35 days

Accounts Receivable Days =232,256,000/3,044,000=76.30 days

Accounts Payable Days = 131,973,000/2,329,405.479=56.66 days

CCC= 98.35+76.30-56.66= 117.99 days

RWC 2020
Average daily sales= 1,163,875,000/365= 3,188,698.63

Average cost of goods sold =917,282,000/365= 2,513,101.37

Inventory Days =215,450,000/2,513,101.37=85.73 days

Accounts Receivable Days =263,205,000/3,188,698.63=82.54 days

Accounts Payable Days = 168,426,000/2,513,101.37=67.02 days

CCC= 85.73+82.54-67.02=101.25 da

Q3:

Reliance Worldwide Corporation

In 2019, Reliance Worldwide Corporation had an estimated total equity of $1.4 billion and remained around
the same amount in 2020. Also, in 2019 the total liabilities of the company increased from an estimated
$680 million to $800 million in 2020. This indicates that the company had been quite aggressive in
financing their growth. The firm’s debt to equity had decreased which shows that the firm has little trouble
with repaying their debts. However, they are still at risk since a good debt to equity ratio is anywhere below
2.0 (Investopedia Team, 2021). On the other hand, the debt to assets ratio of the firm from 2019 to 2020 has
increased from 3.1 to 3.7. Even though the firm’s debt to equity ratio had decreased, the increase in their
debt to assets ratio indicates that a higher percentage of their assets are financed through debts. This
analysis tells us that Reliance Worldwide Corporation, is not a desirable company to invest in as they have
a higher risk of defaulting.

2019

Debt to equity = 2,329,126,000/669,861,000 = 3.5

Debt to assets = 2,076,360,000/669,861,000 = 3.1

2020

Debt to equity = 2,330,533,000/794,036,000 = 2.9

Debt to assets = 215,450,000/794,036,000 = 3.7

NRW Holding: In 2019, the trend of total liability of NRW Holding increased dramatically from
297128000 in 2019 to 747551000 in 2020. Then, the amount of total equity is also rise from 291448000
in 2019 to 472389000 in 2020. Finally, the amount of debt to equity ratio had a slight grow from 1.01
in 2019 to 1.58 in 2020. However, the trend of debt to asset ratio from NRW corporation increased
slightly from 0.17 in 2019 to 0.25 in 2020 which means the company had owned more asset and less
liability. It will good for NRW corporation

2019

Debt to equity = 297128000/291448000= 1.01

Debt to assets = 45434000+55025000/588576000=0.17

2020

Debt to equity = 747551000/472389000=1.58

Debt to assets =96556000+213297000/1219940000=0.25

Q4:

When an investor plans to invest in a company, they usually analyze various key aspects of the company.
Specifically, their profitability is what often concerns the potential investor. There are many methods to
analyze a company’s profitability, one of them is called the DuPont analysis method. The DuPont analysis
is a tool for an investor to evaluate the many sources of a company’s return on equity (Hargrave, 2021).
This is helpful for an investor who wishes to compare the operational efficiency of two firms. The three
main financial metrics that affect the return on equity are: the net profit margin, asset turnover, and equity
multiplier.

Reliance Worldwide Corporation NRW Holdings Limited

2019 2019

Net Profit Margin = 13.71% Net Profit Margin = 2.63%

Asset Turnover = 0.53 Asset Turnover = 1.83

Equity Multiplier = 1.6 Equity Multiplier = 2.0

Return on Equity = 5.7% Return on Equity = 15.7%

2020 2020

Net Profit Margin = 10.16% Net Profit Margin = 4.42%

Asset Turnover = 0.53 Asset Turnover = 6.38

Equity Multiplier = 1.5 Equity Multiplier = 2.4

Return on Equity = 3.8% Return on Equity = 15.6%

Reliance Worldwide Corporation

In 2019, Reliance Worldwide corporation had a net profit margin of 13.71%. In 2020 it decreased to
10.16%. One of the main reasons for the decrease is the firm operated with more debt financing and due to
higher interest expenses, the firm’s net profit margin decreased. The drop of the firm’s return on equity by
1.9% is a concerning problem. This may indicate that the firm is becoming less efficient at creating profits
and increasing shareholder value (Henricks, 2020).

NRW Holdings Limited

In comparison to Reliance Worldwide Corporation, this firm has smaller amounts on its profitability
indicators. However, their increase of net profit margin from 2019 to 2020 shows that this firm performs
very well but not on the same level with Reliance. The increase of NRW’s profit margin indicates efficient
management, low costs, and strong pricing strategies. Also, the increase of the firm’s asset turnover, shows
that the firm is more efficient at generating revenue from its assets. Finally, the small change in their return
on equity shows that the firm is stable and performing well overall. It indicates that the firm is not having
issues with debt and a suitable option for an individual looking to invest.
FORMULAS

Equity Multiplier = Average Assets/ Average equity

number of current year + number of previous year / 2

ROE = Net income/ shareholder equity

RWC (2019) RWC (2020)

EM Average equity

Average Equity 1406499000 + 1419491000 =

2,825,990,000
132401900 + 1406499000 = 2,730,518,000
2,825,990,000/2 = 1,412,995,000
2,730,518,000/2 = 1,365,259,000
Average assets
Average assets
2,076,360,000 + 2,213,52,000 =
2,213,527,000 + 2,076,360,000 = 4,262,304,000
4,289,887,000
4,262,304,000/2 = 2,144,943,500
4,289,887,000/2 = 2,144,943,500

EM
EM
= 2,144,943,500/1,365,259,000
= 2,144,943,500/1,412,995,000
= 1.6
= 1.5
ROE
ROE
133017000/2329126000 x 100 = 5.7%
89,441,000/2,330,533,000 x 100 = 3.8%

NRW (2019) NRW (2020)

EM EM

Average Equity Average equity

291,448,000 + 272,643,000 = 564,091,000 291,448,000 + 472,389,000 = 763,837,000

564,091,000/2 = 282,045,500 763,837,000/2 = 381,918,500

Average assets Average assets

588,576,000 + 520,187,000 = 1,219,940,000 + 588,576,000 =

1,108,763,000 1,808,516,000
1,108,763,000/2 = 554,381,500 1,808,516,000/2 = 904,258,000

EM EM

= 554,381,500/282,045,500 =904,258,000/381,918,500

=2.0 = 2.4

ROE ROE

= 32,270,000/ 206,126,000 x 100 = 73,749,000/472,389,000 x100

= 15.7% = 15.6%

Question 5:

Both firms pose attractive and dissuading qualities for an investor. RWC has an above-average current and
quick ratio even in 2020 when it decreased compared to the previous year. While the current ratio is the
number of assets that can pay off per dollar of liability, a quick ratio is a much more significant tool for
assessing a company’s ability to pay liabilities as it shows us the available that can pay liabilities if
inventory is not sold or sold in credit. Both firms have above 1 quick ratio making them both a safe
investment. Although RWC’s quick ratio has decreased it is not indicative of future changes.

The Cash Conversion Cycle(CCC) can provide an understanding of the success of a company’s method in
managing working capital. The fewer the number of days of CCC means the company can make additional
purchases or pay outstanding debts. The CCC of RWC has decreased in 2020 whereas the CCC for NWH
has increased which could indicate lackings on the part of NHW’s management.

The debt to equity ratio (D/E ratio) and debt to assets ratio measures the debt used to leverage assets and
assets that are financed by debt respectively. The D/E ratio for RWC is comparatively high although it
decreased from the past year. Furthermore, the debt to asset ratio has increased indicating that the company
is financing its growth through debt. This is a double-edged sword because if leverage increases earning
then Paramount Investment Fund can expect high returns but if earning does not exceed debt leverage share
value will plummet. For NHW both D/E and debt to assets ratios have increased although still less than
RWC. However, the ideal D/E ratio can vary but one advantage of a reduced D/E ratio is that it affects
long-term debt.

Lastly, return on equity (ROE) and its three facets; net profit margin, asset turnover, and equity multiplier
are good tools to evaluate a company. RWC generally has a high net profit than NWH but net profit
reduced in 2020 as for NHW it increased. Reduced profit could be due to RWC paying off debt as we can
see an increase in debt to assets. NHW has an equity multiplier of 2 and 2.4 in the next year, it indicates that
half of the assets are financed by debt and the other half is financed by equity. A high equity multiplier
usually indicates a company is using high amounts of depts to finance their assets, NHW’s high equity
multiplier can be explained by increased D/E ratio and debt to asset ratio. Asset turnover is the ratio of sales
or revenue in regard to the asset’s value. It is an indication of how effective a company is in using its assets
to generate revenue. RWC has a significantly higher asset turnover than NHW and as previously mentioned
if debt leverage (D/E) can increase income-earning investors can expect high returns making RWC a
favourable investment choice over NHW. Although NHW has a more attractive ROE and therefore have a
lower risk profile and buffer against bankruptcy, RWC however has proven to be growing faster and
eventually bring higher returns. Therefore, Paramount Investment Fund is better off investing in RWC due
to the projected growth of RWC and expected high returns.

References
Sushinsky, G., 2009. investopedia. [Online]

Available at: https://www.investopedia.com/terms/c/cashconversioncycle.asp

[Accessed 17 january 2020].

Sushinsky, G., 2009. investopedia. [Online]

Available at: https://www.investopedia.com/terms/d/dso.asp

[Accessed 17 january 2020].

Corporate Finance Institute, Debt to asset ratio, viewed on 18 January 2022,

<https://corporatefinanceinstitute.com/resources/knowledge/finance/debt-to-asset-ratio/>

Investopedia Team, 2021, ‘What is considered a good net debt-to-equity ratio?’, Investopedia, 24
October, viewed on 18 January 2022, <https://www.investopedia.com/ask/answers/040915/what-
considered-good-net-debttoequity-ratio>

Bloomenthal, A. 2021, ‘How do you calculate the debt-to-equity ratio?’, Investopedia, 20 May, viewed
on 18 January 2022, <https://www.investopedia.com/ask/answers/062714/what-formula-calculating-
debttoequity-ratio.asp>

Henricks, M. 2020, ‘Return on equity (ROE) : definition and example’, smartasset, 14 January,
viewed on 18 January 2022, <https://smartasset.com/investing/return-on-equity>

Hargrave, M. 2021, ‘DuPont analysis’, Investopedia, 29 August, viewed on 18 January 2022,

<https://www.investopedia.com/terms/d/dupontanalysis.asp>

Hayes, A. 2021, ‘Asset turnover ratio’, Investopedia, 4 July, viewed on 18 January 2022,
<https://www.investopedia.com/terms/a/assetturnover.asp>

Corporate Finance Institute, Net profit margin, viewed on 18 January 2022,

<https://corporatefinanceinstitute.com/resources/knowledge/finance/net-profit-margin-formula/>