Compute a few ratios and compare Reed's results with industry averages. (Some industry averages are given in Exhibit.) What do these ratios signify?
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 equity |
25.9 |
As many ratios may have different meanings following definitions were used in above computations: 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