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Question 2a
The following financial information relates to Wobnig Co.
Income statement extracts
| 2011 | 2010 | |
| $000 | $000 | |
| revenue | 14525 | 10375 |
| cost of sales | 10458 | 6640 |
| ------- | ------- | |
| profit before interest and tax | 4067 | 3735 |
| interest | 355 | 292 |
| ------- | ------- | |
| profit before tax | 3712 | 3443 |
| taxation | 1485 | 1278 |
| ------- | ------- | |
| distribution profit | 2227 | 2165 |
| ------- | ------- |
| statement of financial position extract | ||||
| 2011 | 2011 | 2012 | 2012 | |
| $000 | $000 | $000 | $000 | |
| non-current assets | 15284 | 14602 | ||
| current assets | ||||
| inventory | 2149 | 1092 | ||
| trade receivables | 3200 | 1734 | ||
| ------ | ------ | |||
| 5349 | 2826 | |||
| ------ | ------ | |||
| total assets | 20633 | 17428 | ||
| ------ | ------ | |||
| current liabilities | ||||
| trade payables | 2865 | 1637 | ||
| overdraft | 1500 | 250 | ||
| ------ | ------ | |||
| 4365 | 1887 | |||
| equity | ||||
| ordinary shares | 8000 | 8000 | ||
| reserves | 4268 | 3541 | ||
| ------ | ------ | |||
| 12268 | 11541 | |||
| long term liabilities | ||||
| 7% bonds | 4000 | 4000 | ||
| ------ | ------ | |||
| total liabilities | 20633 | 17428 |
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:
Using suitable working capital ratios and analysis of the financial information provided, evaluate whether Wobnig Co can be described as overtrading (undercapitalised).