Question

Can you help me understand calculating the ratios?

1. Calculate a few ratios and compare Reed’s results with industry averages.
(Some industry averages are shown in Exhibit 4.) What do these ratios indicate?

EXHIBIT 4
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
*Since many ratios may have different meanings the following definitions were used in the above calculations:
Receivable turnover 5 sales/accounts receivable
Average collection period 5 365/receivable turnover
Total asset tumover 5 cost of sales/total assets
Inventory turnover 5 cost of sales/inventories
Payable turnover 5 cost of sales/ accounts payable

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