Reeds Clothier Case Study

Jack Ryan

Dwayne Declouette

Gary Villavicencio

Adrien Noel

1.

Liquidity Ratios | | Reed's | Industry Average |

Current Ratio | 1386/687 | 2 | 2.7 |

Quick Ratio | (1386-738)/687 | 0.94 | 1.6 |

Receivables Turnover | 3054/621 | 4.9 | 7.7 |

Average Collection Period | 365/4.927 | 74 | 47.4 |

| | | |

Efficiency Ratios | | | |

Total Asset Turnover | 3054/2391 | 1.3 | 1.9 |

Inventory Turnover | 2142/738 | 2.9 | 7 |

Payable Turnover | 2142/309 | 6.9 | 15.1 |

| | | |

Profitability Ratios | | | |

Gross Profit Margin | (3054-2142)/3054 | 29.90% | 33% |

Net Profit Margin | 126/3054 | 4.10% | 7.80% |

Return on Equity | 126/795 | 15.80% | 25.90% |

Reed’s Clothier is performing well below the industry standards. The current ratio is 2.0 compared to the industry average of 2.7. This indicates that Reed’s is having issues paying its obligations, which holds true to the current situation. Reed’s quick ratio is .94, which is well below the industry average of 1.6. This may be a result of Jim increasing the inventory size over the years. Reed’s average collection period is 74 days. This is 27 days over the industry average of 47.4 days. This is due to the very lenient collection policy in place.

All of the Efficiency ratios are below industry averages. The total asset turnover ratio for Reed’s Clothier is 1.3 and the industry average is 1.9. This is not as big of a problem as the Inventory turnover ratio and the payable turnover, which is severely below industry average. The gross profit margin for Reed’s Clothier is 30%. This is 3% lower than the industry average of 33%. Reed’s net profit margin is 4.1% and the industry average is 7.8%. Return on equity (15.8%) is also below industry average of 25.9%.

2.

Holmes wants Reed’s to have an inventory reduction sale to generate cash in order to meet its financial obligations. The overdue note payable is due within thirty days and through an inventory reduction sale, Reed’s...