Reeds

Financial Management: Principles and Applications
Week 4 reeds Clothiers Case Study
FINANCE FOR BUSINESS 370
March 22, 2011

QUESTIONS
1. Calculate a few ratios and compargon Reeds results with pains averages.
(Some industry averages are shown in Exhibit 4.) What do these ratios indicate?
queer 4
Reeds Clothiers Selected Ratios*
Liquidity Ratios Industry (Reeds in Parenthesis)
Current ratio 2.7 (2.02)
Quick ratio 1.6(0.94)
receivables employee upset 7.7(4.93)
amount collection period 47.4(74.08)
Efficiency Ratios
Total asset turnover 1.9(1.28)
Inventory turnover 7.0(2.91)
Payable turnover 15.1(6.97)
Profitability Ratios
arrant(a) profit margin 33.0(30.0)
Net profit margin 7.8(4.2)
turn in on common equity 25.9(16.0)
*Since many ratios may absorb different meanings the following definitions were used in the above calculations:
Receivable turnover = sales/accounts receivable
Average collection period = 365/receivable turnover
Total asset turnover = cost of sales/ sum total assets
Inventory turnover = cost of sales/inventories
Payable turnover = cost of sales/ accounts collectible
The ratios indicate that nearly all of the ratios are below industry average. Therefore, Reeds Clothiers is weak and poor in liquidity.



In efficiency, Reeds asset turnover ratio is poor, payable turnover is slight than half of the industry average, and record turnover is extremely low, which meaning inventory remains on site longer. Low inventory turnover is a direct reflection of reduced sales, which increases be because of the associated costs of maintaining the inventory. This lack of sales and liquidity has a sweet sand verbena effect and is a major contributor to low payable turnover, and the profitability ratios being less than industry average.
2. Why does Holmes indispensability Reeds to have an inventory reduction sale, and what does he think will be accomplished by it?
Holmes wants Reed to reduce inventory because of the high costs in...If you want to bond a full essay, order it on our website: Ordercustompaper.com



If you want to get a full essay, wisit our page: write my paper