Asset Turnover and Inventory Methods

What this video covers

• What asset turnover measures, how to calculate it (revenue divided by total assets or average total assets), and why industry context matters for interpretation
• How asset turnover links the balance sheet to the income statement and fits into the DuPont ROE formula (net margin times asset turnover times equity multiplier)
• The FIFO cost flow during inflation: oldest, cheapest inventory to cost of goods sold (COGS), producing lower COGS, higher reported earnings, higher taxes, and newer inventory on the balance sheet
• The LIFO cost flow during inflation: newest, most expensive inventory to COGS, producing higher COGS, lower reported earnings, lower taxes, and older inventory on the balance sheet
• Why LIFO is a deliberate tax-deferral strategy during inflation, not a sign of poor performance, despite producing lower earnings
• The LIFO reserve formula (FIFO inventory minus LIFO inventory), why it is positive and growing during inflation, and what you add back to normalize financial statements
• When to adjust comparable-company analysis and loan covenants by adding the LIFO reserve back to inventory, EBITDA, and earnings per share (EPS)