This particular study is focused on the financial analysis of the Reliance Worldwide Corporation Limited. This report illustrates the financial position of the company from which it can be concluded that whether the Reliance Worldwide Corporation Limited is good for investment for the investors or not. Reliance Worldwide Corporation Limited (RWC) is a leader in the designing, manufacturing, and supply of the flow of the water and the control products and solutions for the usage in behind the wall plumbing. The company is number one manufacturer in the world of brass (Kapil, 2012) ; (Vernimmen & Quiry, 2009); (Vernimmen et al., 2017)..
|
Year |
2015 |
2016 |
2017 |
|
CA |
256 |
254.4 |
313.9 |
|
Cl |
70.6 |
69.7 |
117.9 |
|
Ratio |
3.626062 |
3.65 |
2.66 |
The chart above illustrates that the company’s current ratio is in safe margin zone in the years 2015, 2016 and 2017. The figures of the ratio show that the efficiency of the operations of the company has decreased in the year 2017 from 3.65 to 2.66. The company is required to undertake some serious effective measures for the purpose of enhancing liquidity in the company (Watson & Head, 2016). The current ratio of the company has decreased in the current year in comparison to the previous year which shows that the company’s current assets have decreased in value in comparison to a previous year and it also shows that the company is moving towards adverse effects. There is a need for the company to strengthen its financial position effectively (Corelli, 2016; Tracy, 2012).
|
Year |
2015 |
2016 |
2017 |
|
QA |
120.3 |
135.3 |
151.5 |
|
Cl |
70.6 |
69.7 |
117.9 |
|
Ratio |
1.703966 |
1.94 |
1.28 |
The ideal ratio for the quick ratio maintenance of the company is the 1:1 ratio. This particular ideal ratio reveals that the company basically relies on the inventory of the company or any other assets of the company for the purpose of payment of short-term liabilities of the company. The considerable point is that if the value of the ratio gets high with time, then it shows that the company is not having any type of difficulty in borrowing the shorter term notes. The line chart above shows that the company is revealing satisfactory performance in the terms of value in respect of the quick ratio.
|
Year |
2015 |
2016 |
2017 |
|
CA |
256 |
254.4 |
313.9 |
|
Cl |
70.6 |
69.7 |
117.9 |
|
Ratio |
3.626062 |
3.65 |
2.66 |
This ratio is also known amongst the financial analysts as the current ratio of the company. This ratio helps in determining the liquidity of the organization for the purpose of payment of the liabilities of the company in accordance with the current assets of the company. The working capital ratio of the organization was 3.65 in 2016 and 2.66 in 2017. The ratio of the working capital seems to be more than the ideal value of 1 in the previous years and so it can be concluded that the debt of the organization is completely at a decreasing rate. Any type of increase in the level of the debt is going to make the process of business risky towards the potential credits (Hill & Cpa, 2011; Bragg, 2012).
|
Year |
2015 |
2016 |
2017 |
|
GP |
176.25 |
38.88 |
252.22 |
|
Revenue |
13.335 |
98.29 |
601.69 |
|
Ratio |
13.2171 |
0.395564 |
0.41918596 |
The ratio of gross profit margin helps in analyzing the percentage of the money which is being earned by the company with the help of sales. The higher the ratio of the gross margin gets in the coming time, the more the figure of the profit, the company will be able to take away with it at home. In the year 2015, the figure was high in comparison to 2016 and 2017 (Bragg, 2009).
The decrease in the ratios shows that the cost of goods sold of the company has been stable and that is why there is not much change in the stability of the gross profit margin of the company in the years 2016 and 2017 (Bragg, 2010).
|
Year |
2015 |
2016 |
2017 |
|
total liabilities |
163.5 |
256.09 |
395.04 |
|
shareholder’s equity |
269.45 |
166.99 |
204.75 |
|
Ratio |
0.606792 |
1.533565 |
1.929377 |
The ratio of the debt to equity helps the company in revealing the long-term solvency of the company. The increase happening in the ratio of debt to equity reveals that the asset of the company that is being offered by the shareholders are very less in value than the ones which are being offered by the creditors of the company and because of such reason it is visible that there is leverage condition in the company. Though in case Reliance Word Company, the figure of debt to equity is increasing which shows that the company is going through effective leverage condition. The trend analysis reveals that the ratio has been increasing in the past years. The shareholders of the company are not offering more value of the asset in comparison to creditors.
The debt to equity ratio reveals the company is facing tough time or going out of business and how much assets the debtors could actually claim. In case of Reliance worldwide, the debt to equity ratio for the year 2017 was 1.9 and this shows that the company’s debt can create trouble for the company in a downturn but still it is a manageable level. No matter how much high the level of debt gets if the company is able to cover interest payment, it is considered to be developing a good utilization of that excessive leverage. For keeping an eye on how it is doing on that front, an investor can check how easily a company can service the debts (Greene, 2017).
|
Year |
2015 |
2016 |
2017 |
|
Debt |
25.23 |
163.57 |
270.37 |
|
Total Assets |
432.95 |
423.07 |
599.79 |
|
ratio |
0.058275 |
0.386626 |
0.450774 |
The ratio of debt to total assets helps in analyzing the association in between the debt of the company and the assets of the company. There is an increase in the ratio level which illustrates that the position of leverage of the company is very strong
|
Year |
2015 |
2016 |
2017 |
|
Cash Flow from operations |
54 |
26.16 |
71.92 |
|
Total Liability |
395.04 |
256.09 |
395.04 |
|
Ratio |
0.135682 |
0.102152 |
0.182058 |
The ratio of cash flow from operations of the company helps in determining the measurement of the liquidity of the company. The chart above reveals that the company is being able to generate enough cash to meet its short-term liabilities on time. The figures are positive in value and it shows positive signs.
|
Year |
2015 |
2016 |
2017 |
|
Sales |
451.73 |
98.29 |
601.69 |
|
Net profit |
43.3 |
-1.6 |
65.61 |
|
Ratio |
9.585372 |
-1.627836 |
10.9042863 |
The chart above shows that net profit margin was low in 2016 and thereafter it increased in 2017. The reason behind this increase could be the low cost of production initiate day the company after the loss in 2016. Reliance World Company will be able to make high net profit margin ratio if they will focus on enhancing the sales figures.
|
Year |
2015 |
2016 |
2017 |
|
Sales |
451.73 |
98.29 |
601.69 |
|
Total Assets |
432.95 |
423.07 |
600 |
|
Ratio |
1.043377 |
0.232326 |
1.00316778 |
The total asset turnover ratio of the company shows the conversion rate of the assets of the company into cash form. The high ratio in 2017 and 2015 shows that the conversion rate of the assets was high in these years. The low ratio in 2016 shows that the conversion was slow in 2016. The speed of conversion in 2017 was 1.00 in 2017 which was higher than that in 2016. This increment reveals that the time taken by the company in converting the assets of the company into cash has increased. Though the changes are not big still it shows a positive sign for the company (Chandra, 2010; Periasamy, 2009)..
|
Year |
2015 |
2016 |
2017 |
|
Net Income |
43.3 |
-1.6 |
65.61 |
|
Total Assets |
432.95 |
423.07 |
600 |
|
Ratio |
0.100012 |
-0.003782 |
0.10938829 |
The ratio of the return on assets has increased in 2017 from -0.03 to 0.109. The ratio analysis shows that the profitability of the company related to the total asset return is increasing and it is a positive sign for the company as the company is having high value in 2017. However, on the other side, it shows negative sign in 2016. This negative figure shows that the company was not able to convert the amount invested in assets into cash form. Return on assets has increase din 2017 which reveals that the profitability of the company is increasing
|
Year |
2015 |
2016 |
2017 |
|
Net Income |
43.3 |
-1.6 |
65.61 |
|
shareholder’s equity |
269.45 |
166.99 |
204.75 |
|
Ratio |
0.160698 |
-0.009581 |
0.32044 |
The line chart above shows that the ratio of return on equity has increased in value in 2017 in comparison to 2016. This development is going to help the company in coming a time in the development of the trust of the shareholders of the company. This particular decrease in the ratio shows that the profit in respect of the shareholders is increasing and this could be favorable for the company as it will be able to maintain the trust of the shareholders of the company.
In this case, we have analyzed the profits of the company in respect of the equity of the shareholders. The ratio chart shows that the figure of the ratio in 2017 was 0.32 which is higher in value in comparison to the figure of 2016 which means that the company has been successful in earning compatible profits in the current year in comparison to the profits of the previous year
|
2015 |
2016 |
2017 |
|
|
Operating cash flow |
54 |
26.16 |
71.92 |
|
Total Debt |
25.23 |
163.57 |
270.37 |
|
Operating cash flow / total debt |
2.124455 |
0.15993153 |
0.26600584 |
The line chart above shows that the ratio of operating cash flow upon total debt has increased in 2017 but this increase was not that good as that in the year 2015. The figures of the ratio show that the company is being able to generate cash in 2017 in comparison to 2016 (Pandey, 2015; Sharma, 2016).
The financial statements of the company are prepared using the consistent accenting policies.
In preparation of financial statements of the entities of the company, transactions in currencies other than the company’s functional currency are recognized at the exchange rate at the date of the transaction. The preparation of the consolidated financial statements are in conformance with the Australian Accounting Standards and it needs management to make some judgments, estimations, and assumption which might affect the applications of the policies and amounts of assets and liabilities. There are many issues that come announced, for example, a hurricane or labor strike. So a company needs to maintain enough liquidity for meeting the short-term obligations for survival. Reliance worldwide is able to meet the short-term commitments with its holdings of cash and assets (investing, 2018).
The horizontal analysis of the company is considered as the trend analysis of the company as it helps in determining the trends in the financial data of the company. The analysis stresses on the trends in the earning and assets of the company. Information in respect o the trend is helpful in analyzing the areas of wide divergence. The table in the appendix reveals that the there was 42 percent increase in the total assets of the company. The value of the assets was 423 in 2016 and it reached to 599 in 2017. As far as liabilities of the company are concerned, the total liabilities of the company increased to 54% in 2017which is not a good sign for the company as it reveals that the company is having much liability to pay for. The cash and the bank balances of the company reduced by 2 % in the year 2017. The figures of cash reveal that the company is losing hard cash values from their hands and this might be because of fewer earnings in the current year.
The vertical balance sheet and income statement analysis are considered as the comparison of the various types of line items with the single periods. It basically compares the items of line with the total and thereafter it calculates what percentage the line item is of the total amount. In the year 2017 and 2016, current assets were 52% of total assets. The figure is very low and this shows that most of the assets of the company are not much in liquid form and it might take some time in either investing the money or utilizing it for purchasing the additional plant assets. The assets values are decreasing and because of that, the company is not able to expand its operations in a good manner. With the decrease in the cost of goods, the quality has suffered.
The financial performance of Reliance worldwide company is satisfactory however there are some ratios that shows that the company is in need of undertaking some sort of actions against the policies that will help in earning effective profit level. There s high-level requirement of enhancing the asset conversion rate of the company. The ratio analysis has helped in determining that the company is showing good signs of better performances. Net profit and gross profit margin of the company has enhanced and even the financial position of the company has also improved in the year 2017. However, the noticeable point is that the increase in the ratios is not that high that it can be considered as substantial for the company. There is room for improvement in the financial position of the company. (Lasher, 2013)
Company is currently having less financial risk than the sector average and the financial risk would decline even further is equity finance was used. If debt finance will be used then the financial risk world initially rise slightly above the sector average but would return soon to the sector average level.
Long Term Debt: Considering the case of Reliance Company long term debt financing is suggested to purchase major assets like buildings and equipments. Long term debt which are secured by assets are having low cost of borrowing. This is especially true when the bank, maintains low borrowing rates for supporting the business growth. An additional benefit with relatively low financing cost, is that the interest payment on assets acquired for the business are generally tax deductible. Compared to the alternative of short term debt with suppliers and equity investments, long term debt is structured and stable. Company can opt for equity financing, old finance or bank finance.
Short Term Debt; Short term debt is utilized for funding short term financial commitments, like payroll, recurring expenses and much more. Though the firm have some short term debt, cash flow issues should not be taken lightly. Poor cash flow management is detrimental to business. The goal need not to be to eliminate the short term debt but to manage it. Company need to re examine the credit terms offered by suppliers. Generally for such big companies it is advisable to operating line of credit. This can be accessed at any point of time, usually with low cost, should company find short of funds. It lets the company extend cash resources when need. Another option is to use the business credit card for small purchase, like office supplies. Advisors advises that company should pay down the credit card balances in full every month for avoiding additional interest charges (Royal Bank of Canada, 2010).
As the volatility in equity markets in this particular year demonstrate, the world continues to be risky place. Faster moving changes in the foreign exchange have impacts on stock markets and confidence of business. Such developments has enhanced the continuing need for financial tool of derivative funding which can mitigate an escalation of the uncertainty which ca freeze investments and hiring plans. Reliance company need to use derivative as funding source as it involves three purpose: risk management, price discovery and reduction of transaction cost. Derivatives can help in management of risk from cash flow volatility arising from the adverse changes in the market rates, exchange rates and commodity prices, as the company is working at global platform (DeVol, 2016). The tax codes also offers incentives for the purpose of hedging the cash flow volatility and income. Hedging strategy involves derivatives which can alleviate under investments created by insufficient cash flow and risk aversions. At present hedging and speculation strategies along with the derivatives, are useful tools and techniques which will enable the company to more effectively manage the risk.
Capital is usually the single great barrier to an entrepreneur for starting business. Even the companies like Reliance worldwide are requiring significant amount of capital for covering the major expenses like rent and labor. The main alternative solution available for the company is to use the insurance as the seed funding (Keng, 2016).
Thee benefit of insurance loan for entrepreneurs are: no credit or background checks that might affect the credit history, flexible payment schedules because one is not required to make monthly repayments and lower rate of interest.
There are many methodologies that company may consider to value the shares of company. Though different values are arrived under all the varied methods, it is important for a value to arrive at fair value. In practice, the valuer normally, utilizes methodologies of valuation and arrives at fair value. In practice, the company need to use several methodologies of valuation and arrive at fair price for entire business. The selection of method depend son purpose of valuation. In case valuation is for the purpose of liquidation, the business would want to use the realizable value of the net asset of the company and not the earning capacity. Company can use net asset value method for valuation purpose. The method represents the value of the business with reference to the asset base of the company and the liabilities attached on the valuation date (Bcas Online, 2018). This method is advisable as it is easy to calculate, readily available and offers minimum value of the company.
Conclusion
It is visible that the conversion rate of the assets is not that adequate but still it is a good company than most of the competitive companies in the same sector. The stocks of the company are also doing well in the market. The company is currently surrounded by a higher level of expectations and this basically calls for higher level of additional risk factor. The ratio analysis of the company reveals that the organization has successfully decreased the level of the funds with the help of debts. The company is having a good amount of liquidity for the purpose of meeting out the liability level. The level of profit margin has enhanced in the past years adequately. As the company has been successful in decreasing the level of funds with the help of debts, so there is a requirement for enhancing the leverage position of the company. The profit margin of the company has been increasing but the rate of conversion of the assets is decreasing. This might have possibly taken place because of inefficient operations of the company. The company is currently in good form from the view of investment as it has liquidity in debt repayment and it also the capability of improvement.
It is expected that the margins of the company will expand in coming years, with an expectation of 10 percent at least in annual revenue growth and the net income. This shows that future earnings growth of the company is basically driven by the enhanced cost efficiency and along with that side revenue level also increases, which will enlarge the incremental amount of the net income which is retained from the figure of forecasted revenue growth of the company.
Despite all this, the investors of the company need to realize that the expected margin has varied impacts on the profits and returns which depends on the underlying situations, which basically helps in the reinforcement of the importance of the deep research level. It is quite useful to determine and judge the profit margin of the company and its implication associated with the return in comparison to the other companies that are having similar trait levels. In case of Reliance worldwide the future margin of profit is expected to expand along with the development of industry margins (Bragg, 2010). This turns up as an indication of the confidence amongst the research analysts which covers the tocks that the nature of the Reliance worldwide earnings will be resulting in high level of return per dollar of equity in comparison to the industry.
However, the margins use the items on the income statement that are prone to be manipulated by varied measures of accounting that can distort the analysis. Thus it is important to run the analysis on the future earning of reliance Worldwide while maintaining the watchful eye over the sustainability of the methods of cost management and the runaway for the top line growth level.
References
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DeVol, R., 2016. Derivatives: Good for Risk Mitigation and Growth. [Online] Available at: https://www.huffingtonpost.com/ross-devol/derivatives-good-for-risk_b_9778838.html.
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Keng, C., 2016. Entrepreneurs Funding Businesses With Their Insurance Policies & Avoiding Taxes. [Online] Available at: https://www.forbes.com/sites/cameronkeng/2016/03/17/entrepreneurs-funding-businesses-with-their-insurance-policies-avoiding-taxes/#2c24c0f32f65 [Accessed 12 May 2018].
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