Reed Clothier Case

QUESTIONS

1. Calculate a few ratios and compare Reed’s results with industry averages.

(Some industry averages are shown in Exhibit 4.) What do these ratios indicate?

The current ratio shows Reed’s ability to pay back it’s short-term liabilities with it’s short-term assets. The higher the ratio is the more capable a company is to pay back its obligations. A ratio under one suggests that a company would not be able to pay off its obligations if they came due at that time. Although Reed’s ratio is still well above one their ratio is below that of the industries average Reed’s is not operating as efficiently as they could. The quick ratio is another indicator of a company’s short-term liquidity and is more conservative than the current ratio. Inventory is left out of this equation because some companies have difficulty turning their inventory into cash. In the case of Reed’s we see that the quick ratio is .94 which is under one and under the industry average of 1.6 showing they may not be able to pay their bills on time. The asset turnover ratio measure a firm’s efficiency at using its asset in generating revenue. Again, Reed’s is below the industry’s average and is not very high therefore showing us that they haves a high profit margin on their products. The next ratio inventory turnover ratio is used to show how many days it takes to sell the inventory on hand. The industry average for inventory turnover is 7 and Reed’s 2.91. This is much lower than the industry’s average and leads one to believe there is poor sales and excessive inventory. Having high inventory is beneficial for a business because it represents an investment with a zero rate of return. The profitability ratios are indicators of how efficient a company is operating. Again Reed’s is well below the industry’s average in the three ratios. The net profit margin is the best indicator for a company’s efficiency because it takes into consideration all expenses of the company. Reed’s...