Finance 370

(1)Profitability ratios are ratios which are utilized to determine a company’s profitability in a certain year. Both the net profit margin and the gross profit margin establish a company’s operational profit. Return on common equity establishes shareholders’ returns. When comparing Reed's Clothiers’ results to that of the overall industry, it is apparent that the company’s gross profit margin is a little below the industry’s average. Nonetheless, the company’s return on common equity and net profit margin is significantly lower when compared to the industry as a whole. Gross profit margin = Gross Margin / Sales = 607 / 2,035 = 29.83% compared to 33.0%

Net profit margin

= Net Income / Sales = 85 / 2,035 = 4.18% compared to 7.8%

Return on common equity

= Net income / Common equity = 85 / 530 = 16.04% compared to 25.9%

Liquidity ratios are basically ratios which are utilized in order to determine a company’s capacity to pay off its short-term debt. Current ratio and quick ratio should be more than one. When it comes to receivable turnover, high turnover is a good thing, which shows that there is adequate collection occurring and the collection period is not long. When comparing Reed's Clothiers’ results to that of the overall industry, it is apparent that the store is behind, which means they experience difficulties in fulfilling short-term obligations and collections.

Current ratio

= Current assets / Current liabilities = 921 / 457 = 2.02 compared to 2.7

Quick ratio

= (Current assets – Inventory) / Current liabilities = (921 – 491) / 457 = 0.94 compared to 1.6

Receivable turnover

= Sales / Accounts receivable = 2,035 / 413 = 4.93 compared to 7.7

Avg. collection period

= 365/ Receivable turnover = 365/4.93 = 74.08 compared to 47.4

Efficiency ratios are ratios which are utilized to determine the efficiency of a company’s capacity to manage its assets, inventory, and payment. Having an elevated total asset turnover and...