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Bharat Refineries Ltd., which is operating for the last 6 years. It has approached Moon Organic
Chemicals Ltd. for grant of credit limit on account of goods bought from the later. Bharat Refineries Ltd.
Has submitted its Balance sheet and Income statement for last 2 years to the later for analysis and grant
of credit.
Moon Organic Chemical Ltd., has established the following broad guidelines for granting credit limits to
its customers:
I. Limit Credit Limit to 10% of net worth and 20% of the net working capital.
II. Not to give credit in excess of rupees one crore to any single customer.
Case Study 4: Assessment of Credit Worthiness and Grant of Credit Limits
Current Last
Working Notes Year Year
a) Liquidity Ratios
1 Current Ratio
Current Assets 1150 700
Current Liabilities 1000 1.15 350 2
3 Inventory Turnover
Cost of Goods Sold 3920 3300
Inventory 580 6.758621 300 11
4 Debtor Turnover
Sales 5980 5780
Receivables 350 17.08571 200 28.9
b Profitability Ratio
1 Profit Margin
EBIT 1130 1750
SALES 5980 18.89632 5780 30.27682
2 Return on Investment
EBIT 1130 1750
Total Assets 3400 33.23529 2850 61.40351
3 Return on Equity
EAT 590 1014
Equity 1900 31.05263 1700 59.64706
Case Study 4: Assessment of Credit Worthiness and Grant of Credit Limits
1. The cost of goods sold has increased by Rs.620 lakhs (3920-3300) but the corresponding sales
increase amounted to Rs.200/- lakhs only.
2. The current ratio and quick ratio gives an indication of adverse liquidity position.
3. Inventory turnover ratio has slipped from 11 times to 6.76 times, is an indication of poor sales
and ineffient inventory control system.
4. Debtor turnover ratio has declined from 28.9 to 17.09 indicates liberal credit policy extended to
customers and mounting of debtors balances.
5. Profit margin has declined from 30.28 to 18.9
6. Return on Investment has declined from 61.40 to 33.24
7. Return on equity has also drastically declined from 59.65 to 31.05
8. Current liabilities have substantially been increased by Rs. 650 Lakhs (1000-350) during the
current year.
9. The composition of current assets gives an indication of locking up of working capital in
inventories.
10. The quick assets viz. marketable securities and cash balances have declined during the current
year.
11. The long term liabilities have reduced from Rs.800 lakhs to Rs.500 lakhs short term funds might
have used for repayment of long term liabilities.
12. The company has skipped the payment of dividend for the current year.
13. General and administration expenses have increased by Rs.200 lakhs (950-750) during the
current year.
Case Study 4: Assessment of Credit Worthiness and Grant of Credit Limits
Moon Organic Chemical Ltd., has established the following broad guidelines for granting credit limits to
its customers:
I. Limit Credit Limit to 10% of net worth and 20% of the net working capital.
II. Not to give credit in excess of rupees one crore to any single customer.
Analysis: Bharat Refineries Ltd. May be allowed a credit limit of Rs.30 lakhs with constant
appraisal of it performance and financial position.