What are the red flags when inventory grows faster than revenue?

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AcadiFi · Accepted Answer

Inventory rising 34% against 6% revenue growth at Tamarind Electronics is a classic early warning. Three diagnostic layers apply. Layer one: days inventory outstanding (DIO). If DIO moved from 72 to 96 days, Tamarind is sitting on 24 extra days of stock, often $180M-250M of tied-up capital. Layer two: inventory composition. Break out raw materials, work-in-process, and finished goods. Rising raw materials with flat finished goods suggests production anticipation for a launch. Rising finished goods with flat raw materials suggests demand softness and unsold stock. Tamarind reporting finished goods up 48% with raw materials flat is the worst pattern. Layer three: obsolescence and write-down risk. Electronics inventory ages quickly. If Tamarind hasn't raised its obsolescence reserve proportionally (stayed at 3% of gross inventory), a write-down is brewing. Compute the lower-of-cost-or-market exposure, especially for components facing price declines. Additional checks: segment disclosure, industry peer DIO, management commentary in the 10-K or AR. Look at gross margin trend. If margin fell from 42% to 37% while inventory ballooned, the company is discounting to move product. Watch the next two quarters for inventory write-offs, gross margin compression, and guidance cuts. Inventory is the canary: it tells you about demand 1-2 quarters before revenue does. Pair this with channel checks and credit-card data where possible.

What are the red flags when inventory grows faster than revenue?

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