Looking for a list of mega-cap tech stocks that could be in trouble? For ideas we crunched the numbers, and identified a list of companies that have seen their inventories grow significantly faster than revenues during the most recent quarter.
To help you understand why bloated inventories are a potentially damaging development, we'll explain each term clearly. The complete list follows below.
Any property or holding that has tangible value is listed on the company's balance sheet as an asset. This can include cash, product inventory, accounts receivable, land, equipment, investments, and more.
There is no right or wrong proportion of current (short-term, liquid) assets and long-term assets. However, dwindling cash and current asset levels should be a concern -- it may be a sign of growing illiquidity, which can hamper or even paralyze a company.
"The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale," explains Investopedia.
Furthermore, inventory represents one of the most important assets that most businesses possess, because the turnover (i.e., sales) of inventory represents one of the primary sources of revenue for a company.
In cases where inventories are growing faster than revenues, a flag is raised. In general, the relationship between revenues and inventory should remain constant, but if revenue grows significantly faster than inventories it may be a signal that the company is struggling to sell its inventory fast enough (i.e., a lower than expected demand for its products)
A word of caution: Rising inventories isn't always a bad thing. In many cases, a company may boost inventory in anticipation of future demand.
Nevertheless, a breakdown in the relationship between revenues and inventory requires close attention.
Now that you're armed with the knowledge, use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. LM Ericsson Telephone (Nasdaq: ERIC ) : Provides communications equipment, professional services, and multimedia solutions to mobile and fixed networks operators worldwide. Market cap at $29.36B. Revenue grew by 14.17% during the most recent quarter ($54,770M vs. $47,972M y/y). Inventory grew by 19.55% during the same time period ($35,144M vs. $29,397M y/y). Inventory, as a percentage of current assets, increased from 15.81% to 18.08% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).
2. Research In Motion Limited (Nasdaq: RIMM ) : Designs, manufactures, and markets wireless solutions for the worldwide mobile communications market. Market cap at $10.74B. Revenue grew by -9.81% during the most recent quarter ($4,168M vs. $4,621.34M y/y). Inventory grew by 112.62% during the same time period ($1,372M vs. $645.27M y/y). Inventory, as a percentage of current assets, increased from 10.79% to 18.74% during the most recent quarter (comparing 13 weeks ending 2011-08-27 to 13 weeks ending 2010-08-28).
3. Agilent Technologies (NYSE: A ) : Provides bio-analytical and electronic measurement solutions to the communications, electronics, life sciences, and chemical analysis industries in the United States and internationally. Market cap at $10.21B. Revenue grew by 22.18% during the most recent quarter ($1,691M vs. $1,384M y/y). Inventory grew by 30.38% during the same time period ($897M vs. $688M y/y). Inventory, as a percentage of current assets, increased from 12.0% to 17.17% during the most recent quarter (comparing 3 months ending 2011-07-31 to 3 months ending 2010-07-31)
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen does not own any of the shares mentioned above. Data sourced from Google Finance.