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