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Here's Why Mitcham Industries's Latest Report Might Worry You

Seth Jayson
January 28, 2013

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 Mitcham Industries (Nasdaq: MIND  ) out of line? To figure that out, start by comparing the company's inventory growth to sales growth. How is Mitcham Industries doing by this quick checkup? At first glance, not so great. Trailing-12-month revenue increased 18.6%, and inventory increased 30.1%. Comparing the latest quarter to the prior-year quarter, the story looks potentially problematic. Revenue contracted 33.7%, and inventory expanded 30.1%. Over the sequential quarterly period, the trend looks worrisome. Revenue dropped 19.5%, and inventory grew 7.8%.

Advanced inventory
I don't stop my checkup there, because the type of inventory