Compute a few ratios and compare Reed's results with industry averages. (Some industry averages are given in Exhibit.) What do these ratios signify?
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 
As many ratios may have different meanings following definitions were used in above computations: Receivable turnover = sales/accounts receivable
Average collection period = 365/receivable turnover
Total asset turnover = cost of sales/total assets
Inventory turnover = cost of sales/inventories
Payable turnover = cost of sales/accounts payable