Reed's Case Study and Questions

Reed’s Study Case & Questions

Summary:

As we take a look at the Ratios, we find that Mr. Reed is poor on all the parameters. We are showing that the store’s current and quick ratio is less than industry and so liquidity is poor. The company has used more assets than the industry and hence the efficiency in the use of assets is low. It also keeps much more inventory and collects cash more slowly. The payables turnover is extremely low since it pays after a longer time to the creditors.

The profitability is also poor with lower gross margin and net margin. The return on equity is also less than industry average.

Calculating Ratios & Indications:

Reed's Clothiers Selected Ratios

The current ratio = current assets / current liabilities

Reed’s Industry

921 / 457 = 2.02 2.7

Reed’s current ratio is lower than the industry’s current ratio however the 2.02 ratio indicates that the business has twice as much assets and liabilities and with good management should be able to meet obligations.

The inventory turnover = cost of sales / inventories

Reed Clothiers Industry

1,428 / 491 = 2.91 7.0

Reed’s inventory turnover is lower than the industry inventory turnover. Reed’s low inventory turnover percent indicates that merchandise is not getting sold fast enough and could cause unused product to deteriorate.

Gross Profit Margin = gross profit / total revenue

Reed Clothiers Industry

607 / 2,035 = 29.8 33.0

unable to control its production costs.

Inventory Reduction & Accomplishing:

Mr. Holmes asked Mr. Reed to have an inventory reduction sale to generate cash, because the note is coming due. There is not enough cash to repay the note. An inventory reduction sale, which can be considered cash only basis will allow Mr. Reed to generate enough cash to repay the note since the note due is $130,000 and the total inventory with the company is $491,000.00.

Affect on Sales By Tightening Capital Policy:

Yes, there is a possibility that tightening the working capital...