Compute a few ratios and compare Reed's results with industry averages. (Some industry averages are given in Exhibit.) What do these ratios signify?
Reed's Clothiers Selected Ratios
| Liquidity Ratios |
Industry |
| Current ratio |
2.7 |
| Quick ratio |
1.6 |
| Receivables turnover |
7.7 |
| Average collection period |
47.4 |
| |
|
| Efficiency Ratios |
|
| Total asset turnover |
1.9 |
| Inventory turnover |
7.0 |
| Payable turnover |
15.1 |
| |
|
| Profitability Ratios |
|
| Gross profit margin |
33.0 |
| Net profit margin |
7.8 |
| Return on common equity |
25.9 |
As many ratios may have different meanings following definitions were used in above computations: Receivable turnover = sales/accounts receivable
Average collection period = 365/receivable turnover
Total asset turnover = cost of sales/total assets
Inventory turnover = cost of sales/inventories
Payable turnover = cost of sales/accounts payable