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Don't Get Too Worked Up Over Clearwater Paper's Latest Numbers

Seth Jayson
May 13, 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 Clearwater Paper (NYSE: CLW  ) out of line? To figure that out, start by comparing the company's inventory growth to sales growth. How is Clearwater Paper doing by this quick checkup? At first glance, OK, it seems. Trailing-12-month revenue decreased 2.2%, and inventory increased 1.7%. Comparing the latest quarter to the prior-year quarter, the story looks decent. Revenue grew 0.7%, and inventory expanded 1.7%. Over the sequential quarterly period, the trend looks OK but not great. Revenue dropped 0.4%, and inventory grew 7.5%.

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 goods. (Some companies report the first two types as a single category