Financial Analysis Of NRW Holdings Limited: Trends And Ratios

PROFITABILITY RATIOS

The report analyses the financial position of NRW Holdings Limited for the 3-year period. The report calculates and analyses different levels of financial ratios from 5 key categories to determine the financial health of the organization and understand its overall Trend in the past 3 years. Further calculations are based on DuPont analysis profitability segment and trend of different ratios over the period of 3 years. Hence, the help of adequate interpretation of the financial ratios while comparing them with various benchmarks would eventually help in understanding the current financial position of the company and provide adequate recommendations to the organization.

The profitability ratios directly provide information regarding the overall capability of the organization to generate income in comparison to other factors such as revenues, equity and assets. Hence, attitude levels of ratios are calculated from which the return on equity of the organization is determined to be at the level of 11.25% in 2021, which was higher in 2019 for a value of 11.44%. Therefore, it could be understood that the return on equity of the organization declined over the three periods along with the return on assets, which reduced, from 9.42% in 2019 to 7.32% in 2021 (Nrw.com.au 2022). This decline in the levels of financial ratios is mainly due to the reduction in the levels of net profit obtained by the company in the current financial year. However, the total assets of the company mainly increased in the three-year period, whereas the net income declined, which is the main reason why the financial ratio such as profitability is putting negative attributes on the organization.

Further analysis is based on the gross profit margin operating profit margin and net profit margin of the company. Therefore, it could be understood that only the gross profit margin of the company improved during the three-year period were both operating profit margin and net profit margin declined due to the reduction in the levels of earnings before interest and net income of the organization. The declining values directly indicate that the company was able to control the cost of goods sold for the organization, which is the main reason why the gross profit margin increased whereas the administrative expenses and interest cost was relatively higher which is the main reason for the decline of net profit margin and operating profit margin. However, the industry average gross margin is 36.34%, operating margin is 13%, and net profit margin is 2.53%, where on all counts the organisation’s overall profitability ratios are higher (Investing.com 2022).

The asset efficiency ratios mainly utilise calculations of Asset turnover, Days Inventory, Days debtors, Times inventory turnover and Times debtors turnover ratio. Therefore, with the use of such data points the overall efficiency position of the organisation is determined, which can help in understanding whether the management is adequately utilising the current working capital to improve performance and reduce blockage of capital. Hence, the asset turnover ratio and day’s inventory ratio declined in their performance in 2021, as compared to 2019. The asset turnover ratio declined, while the day’s inventory ratio increased, which states that the performances of both the ratios were unsatisfactory. Moreover, the increment in days of debtors stated about the increased level of time that the capital would be available to the company, which is a positive attribute. Consequently, in a combination of Asset turnover, Days inventory, and Days debtors ratio the efficiency of the organisation declined in 2021 as compared to 2019.

ASSET EFFICIENCY RATIOS

Further analysis is done on the Times inventory turnover and Times debtors turnover ratio, which declined in 2021 when compared to 2019. The Times inventory turnover ratio decreased from 31.70 in 2019 to 30.51 in 2021. Moreover, the Times debtors turnover ratio declined from 7.74 in 2019 to 5.68 in 2021. Thus, the efficiency performance of the management in controlling the working capital of the organisation mainly declined. The industry average for Asset turnover is 1.32, the Times inventory turnover is 128.88 and the Times debtors turnover ratio is 5.05, where it is detected that on all counts the performance of the organisation is higher than the industry averages (Investing.com 2022).

The liquidity ratios comprise of Current ratio, Acid test (quick) ratio and Cash flow ratio (liquidity), which provide information on the financial capabilities of the organisation. The current ratio and quick ratio of the organisation have mainly increased in value over the period of three years, which indicates that the financial performance has improved. The capability of the organisation to support its short term obligations has improved, as it can pay out its obligations with the current assets without hindering the fixed assets of the business. The current asset value has increased from 1.11 in 2019 to 1.46 in 2021, where the performance of the company increased, as it was able to secure higher current assets in comparison to current liabilities. Further analysis indicates about the quick ratio, which excludes inventory and prepaid expenses, where the values have increased from 0.86 in 2019 to 1.32 in 2021. This increment indicates that the capability of the organisation has increased to support its short term oblivion without selling the inventories of the business. In addition, the cash flow ratio of the company declined from 0.43 in 2019 to 0.30 in 2021, where current liabilities were higher in comparison to operating cash flows, which depicts about the decline in the values of its financial capabilities. The organisation is to maintain adequate operating cash flow to support its short term obligations.

The analysis is based on the capital structure or leverage ratios of the organization for the period of three financial years. Ratios such as debt ratio, interest coverage ratio and debt coverage ratio are directly evaluated to understand with the organization’s capability to remain solvent is viability in this previous financial year. The depression of the company has increased from the levels of 25.12% in 2019 to 55.89% in 2021, where the interest coverage ratio and the debt coverage ratio have increased in similar years. Increment in the overall capital structure compositions of the company indicates that debt has increased in contrast to the equity conditions of the company. This mainly states that the probability of the organization becoming insolvent has increased. However, the ratios of the capital structure in controlled value where the insolvency risk is low (Kadim, Sunardi and Husain 2020). Continuous increment in the depression and depth of the company would directly force the organization to become solvent and cease to work due to the high-interest payments needed on an early basis. Leverage ratios directly provide the organization with the adequate financial attributes of the company where its capability to support its operations is determined. The company has been using depth to support its operations throughout the three financial years, which directly indicates that the management prefers debt in comparison to equity capital for accumulating different assets of the organization.

LIQUIDITY RATIOS

The analysis of market performance or investment ratios directly indicates about the probability of whether the investors are interested in the shares of the organization. The overall analysis indicates that the dividend payout ratio has increased along with dividend yield over the period of 3 years, which indicates that the sharing of wealth has improved by the management. This is a positive indication, that it would attract more investors and the share price of the organization would increase in future. However, the overall data regarding the P/E ratio has depicted a decline in the preference of investors regarding the shares of the organization where the values have reduced from 29.19 in 2019 to 11.76 in 2021. Therefore, due to the falling share price of the organization while the overall EPS increased during a similar period (Hosaka 2019). The demand for the shares of the organization has fallen in the three-year period, which is the main reason, why the P/E ratio has declined to lower levels.

The above table provides information regarding the DuPont analysis of the company where the return on equity is derived which has declined from 11.44% to 11.25% in 3 years after peaking at 19.54% in 2020. Therefore, it could be understood that this decline in the overall values of return on equity from DuPont analysis is due to the reduction in net profit margin and asset turnover, while the financial leverage has increased in value over the three year period (Zorn et al. 2018). Thus, it could be understood that the overall performance of the company has declined due to the accumulation of higher debt, while profits and asset returns have declined in this similar period.

The above figure provides information regarding the segments of different revenues that are generated by the company in the financial year 2021. The company has generated revenues from civil, mining and MET, whereas it loses money from corporate or eliminations. However, it is detected that maximum revenues of the organization are generated from mining, while the civil segment has the second-highest revenue and MET has the lowest revenue in the organization. The analysis provides information that the EBITDA margin of the company for civil is 3.1%, while for mining is 7.1% and MET is 7.9% (Nrw.com.au 2022). Thus, it could be understood that the maximum earnings before interest and tax margin of the company are directly provided by MET in comparison to other segments of the revenue.

The above figure indicates about the overall performance of the organization on the basis of the balance sheet where total assets have increased over the period of 3 years along with total equity, whereas total liabilities have declined as indicated in the above table. Therefore, the performance of the overall balance sheet has improved which indicates that the organization is adequately maintaining the assets, liabilities and equity of the company to support its operational activities. 

The company has witnessed a decline and its overall growth conditions over the period of three financial leaves in revenue, EBIT and net income. This decline directly indicates that the performance of the organization was relatively deteriorating in 2021 in comparison to 2019. Hence, the performance of the organization increased briefly in 2020 but it was not able to maintain the growth rate in 2021.

The financial analysis of the organization directly indicates that the current suitable business strategy of utilizing debt to support operations is not providing adequate sustainability to the company. Hence, the organization needs to minimize the debt exposure by utilizing equity capital and other forms of investments by reducing the debt value of the organization. Furthermore, the company needs to enhance different levels of operations to generate higher revenues as in 2021 the revenue stream of the company was not adequate, as it did not support higher net income and returns.

Conclusion:

The report provides information on the financial attributes of NRW Holdings Limited, where the financial ratios along with DuPont and growth rate indicated about the current financial health of the company. Hence, the profitability, liquidity and efficiency are adequate for the organisation, while the market performance and capital structure are facing some weaknesses, which need to be improved to enhance the future performance of the organisation.

References:

Hosaka, T., 2019. Bankruptcy prediction using imaged financial ratios and convolutional neural networks. Expert systems with applications, 117, pp.287-299.

Investing.com. 2022, NRW Holdings Ltd (NWH) Financial Ratios – Investing.com. Available at: https://investing.com/equities/nrw-holdings-ratios?period_type=ttm (Accessed: 3 April 2022).

Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm’s value based on financial ratios, intellectual capital and dividend policy. Accounting, 6(5), pp.859-870.

Nrw.com.au. 2022, Annual Reports –  NRW Holdings Limited  (ASX:NWH). Available at: https://nrw.com.au/investors/annual-reports/ (Accessed: 3 April 2022).

Zorn, A., Esteves, M., Baur, I. and Lips, M., 2018. Financial ratios as indicators of economic sustainability: A quantitative analysis for Swiss dairy farms. Sustainability, 10(8), p.2942.

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