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Here's Why Deltic Timber's Latest Report Might Worry You

Seth Jayson
December 13, 2012

Here at The Motley Fool, I've long cautioned investors to keep a close eye on inventory levels. It's a part of my standard diligence when searching for the market's best stocks. I think a quarterly checkup can help you spot potential problems. For many companies, products that sit on the shelves too long can become big trouble. Stale inventory may be sold for lower prices, hurting profitability. In extreme cases, it may be written off completely and sent to the shredder.

Basic guidelines
In this series, I examine inventory using a simple rule of thumb: Inventory increases ought to roughly parallel revenue increases. If inventory bloats more quickly than sales grow, this might be a sign that expected sales haven't materialized. Is the current inventory situation at Deltic Timber (NYSE: DEL  ) out of line? To figure that out, start by comparing the company's inventory growth to sales growth. How is Deltic Timber doing by this quick checkup? At first glance, pretty well. Trailing-12-month revenue increased 5.0%, and inventory increased 2.1%. Comparing the latest quarter to the prior-year quarter, the story looks decent. Revenue expanded 16.3%, and inventory grew 2.1%. Over the sequential quarterly period, the trend looks OK but not great. Revenue dropped 1.6%, and inventory dropped 0.3%.

Advanced inventory
I don't stop my checkup there, because the type of inventory can matter even more than the overall quantity. There's even one type of inventory bulge we sometimes like to see. You can check for it by examining the quarterly filings to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goo