June 2012 #2 Part A

Is this discussion correct and sufficient?

Sales have increased by 40% from 2010 to 2011. This is a large increase in sales and suggests that Wobnig Co is experiencing a rapid growth in their business.
The receivables days ratio have also increased from 60 days in 2010 (the industry average) to 80 days in 2011. This could have been due to the increase in credit sales in order to stimulate growth in sales at Wobgnig Co (by offering longer credit terms).
This can lease to Wobnig having problems in meeting their obligations as they fall due.
This is evident in the payables days ratio which has indeed increase from 90 days in 2010 to 100 days in 2011.
This can also result in Wobnig Co suppliers refusing to supply goods on credit, place them in a lower supply priority when goods are scarce and insist cash on delivery transactions only.
Furthermore, since Wobnig Co is having problems with meeting their obligations as they fall due, they may end up having no cash available on hand and have to rely on overdraft facilities from the banking institution which they use.
This is also evident by the mere fact of Wobnig Co using an extra 500% (250-1500/250*100) in overdraft facilities from 2010-2011.
Furthermore, the liquidity ratios of Wobnig Co have decreased suggesting that Wobnig Co is less liquid now than in 2010 and is certainly outside the range of industry averages.
Also, the industry average for the working capital turnover ratio is 10 times. Wognig’s ratio have indeed increased from 11 times in 2010 to 15 rimes in 2011. This suggest that Wobnig Co. is generating more revenue per dollar of investment in working capital.

Conclusion
Wobnig Co. can be said to be overtrading because they meet all the symptoms/indicators of overtrading; namely these include fast sales growth, increasing receivables and payables, fall in cash balances and increasing use of overdraft facilities.

Thanks!