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

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 5

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online