One place to look for further information on how Plainview is doing,
is to do a detailed asset turnover analysis.
Although Plainview's asset turnover ratio was steady over the period.
Looking at the detailed components of the ratio
may give us more insight into what happened with Plainview's turn-around.
For example, when there's dramatic increases in sales, like Plainview had.
You often see lower inventory levels.
So production can barely keep up with sales.
And higher accounts receivable levels because the company has to extend credit
to riskier customers to fuel its sales growth.
And if you remember, on the firm's statements.
We saw all this weird stuff going on with accounts receivable and
inventory over the period.
So let's define the asset turnover ratios.
Basically what these ratios are going to tell us is how many times during a year
a company cycles through its accounts.
For example, an inventory turnover of 8 would've meant that it builds and
sells inventory eight times during the year, on average.
So we're going to look at accounts receivable turnover.
Which is sales divided by average accounts receivable.
Inventory turnover, which is cost of goods sold.
Divided by average inventory.
Accounts payable turnover.
Which is purchases over accounts payable.
Purchases, we're trying to get out the purchase of new raw materials.
So we calculate that as the difference between ending and
beginning inventory plus COGS.
And then fixed asset turnover is sales divided by
average property plant and equipment.
Here are the asset turnover ratios for
Plainview along with the definitions at the bottom.
I'm going to put up the pause sign so you can take a look and
see what these ratios are telling you.