The inventory is often a significant asset category for many companies.
Thus, inventory efficiency will be an important component of total asset
efficiency. Pixar’s inventory turnover is approximately one full turn
slower than DreamWorks. That is, Pixar is less efficient in moving in-
ventory than is DreamWorks.
Differences across inventories, companies, and industries are too great
to allow a general statement on what is a good inventory turnover. For
example, a firm selling food should have a higher turnover than a firm
selling furniture or jewelry. Likewise, the perishable foods department of
a supermarket should have a higher turnover than the soaps and cleansers
department. For Pixar and DreamWorks, the inventory is the cost of films.
Films have a much longer life cycle than, say, on-the-shelf consumer
products. Thus, the inventory turnover is much slower than would be the
case for a consumer products company, such as Procter & Gamble, which
has an inventory turnover of 11.68. Each business or each department
within a business has a reasonable turnover rate. A turnover lower than
this rate could mean that inventory is not being managed properly.Number of Days’ Sales in Inventory. Another measure of the rela-
tionship between the cost of goods sold and inventory is the number of
days’ sales in inventory. This measure is computed by dividing the average inventory
by the average daily cost of goods sold (cost of goods sold divided by 365). The num-
ber of days’ sales in inventory for Pixar and DreamWorks is computed as follows:The number of days’ sales in inventory is a rough measure of the length of time it takes
to acquire, sell, and replace the inventory. For Pixar and Dreamworks, the number of
days’ sales in inventory is the approximate amount of days in a film’s life cycle, from ini-
tial production to final exhibition. This cycle is approximately 1,510 days for Pixar, while
for DreamWorks it is much shorter at 306 days. While there are a number of possible ex-
planations for this difference, it does suggest that Pixar films have a longer production
cycle than do DreamWorks films.Fixed Asset Analysis
The fixed assets consist mostly of the property, plant, and equipment of a firm. These
are usually the largest asset classification for most firms, especially manufacturing
firms. Thus, the efficient deployment of fixed assets will significantly impact the overall
asset efficiency of most firms. Businesses invest in fixed assets in order to create capac-
ity to meet demand. If the capacity is not well matched to the demand, either in terms
of product volume or mix, then the fixed asset turnover can suffer adversely.644 Chapter 14 Financial Statement Analysis
Pixar DreamWorks
(in millions, (in millions,
except ratio) except ratio)
Inventory:
Beginning of year $107.70 $427.50
End of year 140.00 519.90
Total $247.70 $947.40
a. Average (Total ÷ 2) $123.85 $473.70
Cost of goods sold $ 29.90 $566.20
b. Average daily cost of goods sold (COGS ÷ 365) $ 0.08 $ 1.55
Number of days’ sales in inventory (a ÷ b) 1,510 306© ROSE ALCORN/THOMSON