Reed's Clothier Case Analysis - Essay Example

Answer The table below shows the various ratios as calculated for the industry and the Reed’s Clotheirs: Industry Reeds Liquidity Ratios Current Ratio2.72.0Quick Ratio1.60.9Receivables Turnover7.74.9Average CollectionPeriod47.474.1Efficiency RatiosTotal Asset Turnover1.90.9Inventory Turnover72.9Payable Turnover15.17.0Profitability RatiosGross Profit Margin33.00%29.83%Net Profit Margin7.80%4.18%Return on Common Equity25.90%16.04%Table 1: The various ratios for industry and the Reed’sIt can be seen that the current ratio of Reed’s is lower than that of the industry average.

It is however more than 1. This indicates that the company can pay off its current liabilities by using its current debt. However, the quick ratio implies that if the company is not able to sell its inventories, it will not be able to meet is short-term obligations. The average collection period of the company is higher than the industry which indicates that the company takes more time to collect cash. The asset turnover ratio indicates that the company is generating less than 1USD per dollar of assets.

The lower inventory turnover indicates poor sales and high inventory. Answer 2: From the ratio analysis, it is clear that the inventory level of Reed’s is higher than the optimal level. Holmes wants that in order to improve the performance and clear out the $130,000 note payable, Reed puts his inventory on sales. This will increase the cash in hand and reduce the inventory available with the company. This will also improve the quick ratio which is less than 1 at present. Moreover, this will also improve the average collection period of the company.

At the same time, it will also increase the inventory turnover ratio by decreasing the inventory levels. ReferencesShim, J.K and Siegel, J.G. (2007).Schaum’s Outline of Financial Management, 3rd ed. Shaum’s Outline Series. McGraw-Hill