Individual Assignment Week 4

Individual Assignment Week 4 - REEDS CLOTHIER CASE STUDY 1...

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REED’S CLOTHIER CASE STUDY Reed’s Clothier Case Study Jonathan Chretien University of Phoenix FIN370 John Scherzi July 18 th , 2010 1
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REED’S CLOTHIER CASE STUDY Reed’s Clothier is a men’s clothing establishment that was established in 1934. Until 1981, Reed’s Clothier had been a successful organization. In 1981, Jim Reed II decided to finance a remodel for the store, which cost $880,000. Because of this rather expensive remodel, the cash flow of Reed’s Clothier was diminished. Because of this Jim Reed was starting to fall behind on paying suppliers, who were threatening Reed’s Clothier with the ceasing of all deliveries until the payment was made. Because of this, Jim thought he would be able to just go get a loan from the bank. Because of his financial status with Reed’s Clothier, Holmes was unable to grant the loan and gave Jim Reed some advice on how to improve his financial ratios, which would help Jim long-term. Not only for future loans, but to help Jim Reed with his finances. 1) Calculate a few ratios and compare Reed's results with industry averages. (Some industry averages are shown in Exhibit 16.4 .) What do these ratios indicate? Ratios Liquidity Ratios Reed Industry Current ratio 2. 0 2.7 Quick ratio 0.9 4 1.6 Receivables turnover 4.9 3 7.7 Average collection period 74.0 8 47.4 Efficiency Ratios Total asset turnover 1.2 8 1.9 Inventory turnover 2.9 1 7 Payable turnover 6.9 7 15.1 Profitability Ratios Gross profit margin 29.8% 33 Net profit margin 4.2% 7.8 Return on common equity 16.0% 25.9 2
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