Cases in Financial Mangement

Cases in Financial Management
Dallas Stoneburner,
FIN/370
January 8, 2012
Regina Powers

1. Calculate a few ratios and compare Reed’s results with industry averages. What do these ratios indicate?

Reed's Clothiers Selected Ratios | |
| | | | |
Liquidity Ratios | |
| | Reed's | Industry | Period |
Current Ratio | | 2.02 | 2.7 | times |
Quick Ratio | | 0.94 | 1.6 | times |
Receivables turnover | | 4.93 | 7.7 | times/year |
Average Collection period | | 74.08 | 47.4 | days |
| | | | |
Efficiency Ratios | |
Total asset turnover | | 1.28 | 1.9 | times |
Inventory turnover | | 2.91 | 7 | times/year |
Payable turnover | | 6.97 | 15.1 | times/year |
| | | | |
Profitabilty Ratios | |
Gross profit margin | | 29.83% | 33.00% | |
Net profit margin | | 4.18% | 7.80% | |
Return on common equity | | 16.04% | 25.90% | |

At first look, Reed’s Receivables turnover is 4.93 which are 2.77 times/year lower than the Industry. A low ratio implies that he should re-assess his credit policies in order to ensure a timely collection in order to increase his earning interest for his company.   His average collection period is 74.8 days, which are 26.68 more than the industry.   In order to have enough cash to pay off expenses he needs to lower his collection period to turn his receivables into cash.   Finally, his return on common equity is 9% lower than the industry which represents the amount of net income returned as a percentage of shareholders equity. In order to keep the shareholders he must increase his return on common equity.
2. Why does Holmes want Reed’s to have an inventory reduction sale, and what does he think will be accomplished by it?
Holmes wants Reed to have an inventory reduction sale because his inventory turnover, which is 2.91 times per year, is less than half of the industry average at 7 times per year.   A low turnover implies poor sales relative to inventory levels. In Reed’s...