Question 3

a. Analyse the sources of finance for each of the two companies in 2018 as compared to 2017. Use two capital

structure ratios to support your answer and provide an explanation regarding the changes in the composition

of the sources of finance for each enterprise. Note: ensure that you analyse in this question, not just describe

the ratio values. (2 marks)

b. Assume that the average debt ratio for the Capital Goods industry in 2018 was around 50 per cent. What can

you infer about each of the two firms' current capital structure and gearing (leverage) effect in 2018 as

compared to the industry average?

NRW Holdings Limited

Total Debt = Total Short-term debt and Long-term debts

Total Debt in 2017 = $16,705,000.00+$46,394,000.00= $ 63099000

Total Debt in 2018 = $36,921,000.00+ $56,291,000.00= $93,212,000

Debt Ratio

Total Liabilities/ Total Assets

2017

$63,099,000/$331,566,000.00 = 0.1904

2018

$93,212,000/$520,187,000.00= 0.1792

Debt to EquityRatio

Total Liabilities/ Total Equity

2017

$63,099,000/199,073,000.00= 0.3170

2018

$93,212,000/272,643,000.00= 0.3419

Interest CoverageRatio

Operating Profit (EBIT)/ Interest Expense

2017

31,557,000.00/5,733,000.00= 5.5045

2018

45,251,000.00/6,869,000.00= 6.5878

Reliance Worldwide Corporation Limited

Total Debt = Total Short-term and Long-term/non-current liabilities

2017 =9,826,000.00+ $260,539,000.00= $270,365,000

2018 = $2,675,000.00+ $659,670,000.00= $ 662,345,000

Debt Ratio

Total Liabilities/ Total Assets

2017

$270,365,000/$599,787,000.00= 0.4508

2018

$1662,345,000/2,185,944,000.00= 0.3031

Debt to EquityRatio

Total Liabilities/ Total Equity

2017

$270,365,000/204,746,000.00 = 1.3205

2018

$1662,345,000/1,324,019,000.00 =1.2556

Interest CoverageRatio

Operating Profit (EBIT)/ Interest Expense

2017

101,298,000.00/5,061,000.00= 20.0155

2018

105,830,000.00/11,911,000.00= 8.8851