Case Study Of Orica's Credit Policy

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Register to read the introduction… This aligns with the 1 day increase in the Average days sales uncollected (to 53.6) allowing customers more time to pay their bills. Likewise with Inventory turnover, Orica's inventory turnover increased by 2 days (to (XXX), it should be noted that compared to the industry average,
Orica has a much shorter turnover rate, pointing to why they may not be as averse to relaxing their credit policy). This indicates that Orica needs to access its inventory to ensure it does not hold obsolete inventory, while ensuring the products do not deteriorate as they stay for longer periods, or they need to improve their marketing (suggested by (Peavier, 2012)).

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Average day’s sales uncollected, and indicates that Orica is paying off its current liabilities in a shorter time frame. Due care must be taken in this regard as the company has a slightly low liquidity and could potentially have issues with paying off debts in the future if the quality of Orica's management of inventory and receivables does not improve (despite an increase in sales by almost


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This implies that Orica is financing debt at 1.4x what they use shareholder equity to finance
(this helped reduce the impact on ROE as stated above). Combined with Orica's Debt to asset ratio increasing from (XX) to (XX) in 2012, Orica is financing almost 60% of its assets through debt
(increasing their total liabilities by $624m). Orica needs to review its borrowing practises and debt financing as these high ratios show that they are relying more on debt than in the past (which results in increased interest expense). These high ratios also imply that Orica is becoming more capital intensive, which is supported by its Pilbara expansion projects.

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Orica's cash flow is also very low covering only (XX) of their total liabilities (a significant drop from
(XX) in 2011). The main impacts resulting from its payment to suppliers and employees ($820m increase over 2011), increased debt (as shown by the debt ratios) and weak cash flow generation (a
$210m decrease from 2011). With smaller cash flow from operations, Orica needs to either

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