FIN 370 WK 4 Reed

# FIN 370 WK 4 Reed - 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 Clothiers Selected Ratios * Liquidity Ratios Industry Current ratio 2.7 Quick ratio 1.6 Receivables turnover 7.7 Average collection period 47.4 Efficiency Ratios Total asset turnover 1.9 Inventory turnover 7.0 Payable turnover 15.1 Profitability Ratios Gross profit margin 33.0 Net profit margin 7.8 Return on common equity25.9 Liquidity Ratios Reed Industr y Current ratio 2. 0 2.7 Quick ratio 0.9 4 1.6 Receivables turnover 4.9 3 7.7 Average collection period 74. 08 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

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Return on common equity 16.0% 25.9 If we look at the ratios, we find that Reed is poor on all the parameters. 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. Reeds is also not producing the proper levels of gross profit sufficient to pay expenses, and effects trickle down to the bottom line net profit (which is also significantly lower than the industry average).Reeds is invested too heavily in inventory and is not making enough profit (either sales are too low or costs are too high) to be competitive in the industry. 2.
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## This note was uploaded on 05/10/2011 for the course FIN 370 taught by Professor Emil during the Spring '11 term at Aberystwyth University.

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FIN 370 WK 4 Reed - 1. Calculate a few ratios and compare...

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