Calculate Ratios and compare results with industry averages.
Calculate a few ratios and compare Reed's results with industry averages. (Some industry averages are shown in Exhibit.) What do these ratios indicate?
Reed's Clothiers Selected Ratios
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Liquidity Ratios
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Industry
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|
Current ratio
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2.7
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|
Quick ratio
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1.6
|
|
Receivables turnover
|
7.7
|
|
Average collection period
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47.4
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|
|
|
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Efficiency Ratios
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|
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Total asset turnover
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1.9
|
|
Inventory turnover
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7.0
|
|
Payable turnover
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15.1
|
|
|
|
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Profitability Ratios
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|
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Gross profit margin
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33.0
|
|
Net profit margin
|
7.8
|
|
Return on common equity
|
25.9
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Since many ratios may have 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/total assets
Inventory turnover = cost of sales/inventories
Payable turnover = cost of sales/accounts payable