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.
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 Female Health (Nasdaq: FHCO ) out of line? To figure that out, start by comparing the company's inventory growth to sales growth. How is Female Health doing by this quick checkup? At first glance, pretty well. Trailing-12-month revenue increased 88.7%, and inventory decreased 28.0%. Comparing the latest quarter to the prior-year quarter, the story looks decent. Revenue grew 39.4%, and inventory dropped 28.0%. Over the sequential quarterly period, the trend looks healthy. Revenue grew 14.5%, and inventory grew 9.7%.
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