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Case 16 Reed's Clothier Inc.

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Case 16 Reed’s Clothier Inc
James Jackson
University of Phoenix
Finance for Business
FIN 370
Mr. Arnold Harvey
July 21, 2010

Case 16 Reed’s Clothier Inc

Reed’s Clothiers was founded by Jim Reed in 1934 when Jim retired from the military. Over the years, the business grew, netting over $800,000 by 1976. Jim Reed then decided to retire and handed over the family business to his son, Jim Reed II. The younger Jim then decided to buy a building in a prime area in downtown Lexington, creating a 880,000 mortgage debt. As the years progressed, Reed’s Clothiers success grew along with their inventory stock. Because of the rapid growth in Reed’s Clothiers’ inventory, debt was incurred. As the debt grew out of control and accounts became past due, Jim decided to make a visit to the bank his family did business with. There he learned that he was over extended in his credit and that he now had more debt and past due accounts than he did cash flow. The banker suggested that Jim hire a specialist to help manage his inventory and to get the company back on track. It was then Jim knew Reed’s Clothiers was in financial trouble. Reed’s Clothiers
Question 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?
Ratio Reeds Industry
Current (current assets/current liabilities) 2.0 2.7
Quick ((current assets-inventory)/current liabilities)) 0.94 1.6
Gross Profit Margin (gross profit/sales) 29.8% 33%
Net Profit Percentage (net profit/sales) 4.2% 7.8%

The…...

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