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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