# Reed's Case Solution

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1) Calculate a few ratios and compare Reed’s results with industry average (some industries averages are shown in Exhibit 4.) What do these ratios indicates? (15 points) Ratios&amp;computation formulas | Reed's Clother | Industry | Liquidity Ratios | Curren Ratio (Current Assets/Current Liabilities | 921M/457M=2,02 | 2,7 | Quick ratio ((Current assets-Inventories)/Current liabilities | (921M-491M)/457M=0,94 | 1,6 | Receivables Turnover(Sales/Accounts Receivable) | 2,035M/413M=4,9 | 7,7 | Average collection period(365/Receivable Turnover) | 365/4,9=74,5 | 47,4 | Efficiency Ratios | Total assets turnover(COGS/total assets) | 1,428M/1,591M=0,9 | 1,9 | Inventory turnover(COGS/inventories) | 1,428M/491M=2,9 | 7,0 | Payable turnover (COGS/accounts payable) | 1,428M/205M=7 | 15,1 | Profitability Ratios | Gross profit margin (Gross profit/Revenue*100) | 607M/2,035M=29,8 | 33,0 | Net profit margin (Net profit/Revenue*100) | 85M/2,035M=4,2 | 7,8 | Return on common equity (Net Income/Equity) | 85M/530M*100= 16,04 | 25,9 | After having calculated the ratios to check on the performance of the REED's company, we can conclude, that it's poor in comparison with industry parameters. For instance, current and quick ratios, which aim to determine the liquidity are less than those of the industry. Therefore, the company faces to problems with turning assets into cash. Moreover a low ratio of receivables turnover implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. As for a low quick ration relatively to a current ratio tells us, that the inventory is high, meaning there are troubles with selling. They, in turn lead to a low profit margin. 2) Calculate the operating cycle. Explain what this result means. Operating cycle= Inventory