Reeds clothier.doc

Reeds clothier.doc - 1 Calculate a few ratios and compare...

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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? Exhibit 16.4 Reed’s Clothier Selected Ratios Liquidity Ratios Industry Reed Current Ratio 2.7 2.0 Quick Ratio 1.6 0.94 Receivables Turnover 7.7 4.93 Average collection Period 74.08 47.4 Efficiency Ratios Total Asset Turnover 1.9 1.28 Inventory Turnover 7 2.91 Payable Turnover 15.1 6.97 Profitability Ratios Gross Profit Margin 33 29.8% Net Profit Margin 7.8 4.2% Return on Common Equity 25.9 16.0% Let’s take a look at the ratios; we discover that Reed is deprived on all the criteria that have been listed. Its current and quick ratio is less than industry and so liquidity is poor. It used more assets than the industry and hence the efficiency in the use of assets is low. It keeps much more inventory and collects cash more slowly and that possible makes the payables turnover low since it pays after a longer time to the creditors. The profitability is also poor with lower gross margin and net margin. The return on equity is also less than industry average. 2. Why does Holmes want Reed's to have an inventory reduction sale, and what does he think will be accomplished by it? Holmes wants Reed to have an inventory reduction sale to generate cash. The note is coming due and there is not enough cash to repay then note. Through an inventory reduction sale, which can be on cash basis, Reed can generate enough cash to repay the note. The note is due for

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This note was uploaded on 04/11/2011 for the course FIN 370 taught by Professor Unknown during the Spring '08 term at University of Phoenix.

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Reeds clothier.doc - 1 Calculate a few ratios and compare...

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