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Wobnig Co (6/12, amended)

The following financial information relates to Wobnig Co.

 

20X1

20X0

 

$'000

$'000

Revenue

14,525

10,375

Cost of sales

(10,458)

(6,640)

Profit before interest and tax

4,067

3,735

Interest

355

292

Profit before tax

3,712

3,443

Taxation

(1,485)

(1,278)

Distributable profit

2,227

2,165

 

 

20X1

20X0

 

$'000

$'000

$'000

$'000

Non-current assets

 

15,284

 

14,602

Current assets Inventory

2,149

 

1,092

 

Trade receivables

3,200

 

1,734

 

 

 

5,349

 

2,826

Total assets

 

20,633

 

17,428

Equity

 

 

 

 

Ordinary shares

8,000

 

8,000

 

Reserves

4,268

 

3,541

 

 

 

12,268

 

11,541

Non-current liabilities

 

 

 

 

7% bonds

 

4,000

 

4,000

Current liabilities

 

 

 

 

Trade payables

2,865

 

1,637

 

Overdraft

1,500

 

250

 

 

 

4,365

 

1,887

Total equity and liabilities

 

20,633

 

17,428

Average ratios for the last two years for companies with similar business operations to Wobnig Co are as follows:

Current ratio

1.7 times

Quick ratio

1.1 times

Inventory days

55 days

Trade receivables days

60 days

Trade payables days

85 days

Sales revenue/net working capital

10 times

Required

A. Using suitable working capital ratios and analysis of the financial information provided, evaluate whether Wobnig Co can be described as overtrading (undercapitalised).

B. Critically discuss the similarities and differences between working capital policies in the following areas:

(i) Working capital investment

(ii) Working capital financing

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