Test

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?

Liquidity Ratios Reed’s Industry

Current ratio 2.0 2.7

Quick Ratio .94 1.6

Receivables turnover 4.93 7.7

Average collection period 74.08 47.4

Efficiency Ratios

Total Asset turnover 1.3 1.9

Inventory turnover 2.9 7.0

Payable turnover 7.0 15.1

Profitability Ratios

Gross profit margin 29.8 33.0

Net profit margin 4.2 7.8

Return on common equity 16.0 25.9

Examination of the ratios indicates that Reed’s is in poor condition in all areas compared to the rest of the industry.

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