Especially during earnings season, many investors seem to focus on the income statement. How much revenue was there? How much net income? Yet the balance sheet actually tells us a lot more about how the company is doing, and what it's likely to do in the not-too-distant future. Today, I'll focus on two balance sheet line items: accounts receivable (A/R) and inventories, and how they relate to sales.

In Thornton O'Glove's book, Quality of Earnings, he calls the analysis of A/R and inventory growth relative to sales the "best method" to get ahead of Wall Street analysts:

One of these simple ploys -- the best method I have ever discovered to predict future downwards earnings revisions by Wall Street security analysts -- is a careful analysis of accounts receivables and inventories. Learn how to interpret these ... a larger than average accounts receivable situation, and/or a bloated inventory. When I see these, bells go off in my head.

If A/R rises significantly faster than sales, the company could be stuffing the channel, pulling sales in from the future. It can only get away with that for only so long before customers cry "Enough!" and stop buying for a while. Then the company ends up missing revenue and earnings, and the stock price gets whacked.

Similarly, if inventory's climbing significantly faster than sales, demand could be slowing down, and a big inventory write-down might be coming. Alternately, sales might take a hit when the company employs large markdowns to clear out inventory.

Note that I'm not talking about normal business-cycle stuff. Many retailers build up inventory prior to the holiday season in order to meet expected demand, for example. Instead, I'm looking for a big disconnect between the growth of sales and the growth of A/R or inventory. Such discrepancies make me dig a bit deeper.

Let's apply this test to Western Refining (NYSE: WNR), a crude oil refiner. Here's what the company has reported for the last four-quarter period and the last two year-over-year periods. I've also included similar numbers from a couple of rivals for comparison's sake.


Western Refining

ONEOK Partners (NYSE: OKS)

Tesoro (NYSE: TSO)

Revenue growth, TTM




A/R growth, TTM




Inventory growth, TTM





Revenue growth, year ago




A/R growth, year ago




Inventory growth, year ago





Revenue growth, 2 years ago




A/R growth, 2 years ago




Inventory growth, 2 years ago




Source: Capital IQ, a division of Standard & Poor's; TTM = trailing 12 months.

As you can see, over the past couple of years, Western Refining has had some pretty big swings. Sales grew tremendously a couple of years ago, only to fall off a cliff. Inventory and A/R tracked fairly well (I'm not too worried when they track more slowly). However, over the past year, A/R has grown more quickly than revenue, which is a bit worrisome. ONEOK has done pretty well when looking through this lens, while Tesoro had a bit of a problem a couple of years ago.

Pay attention to the balance sheet, plug a few numbers into a simple spreadsheet, and according to O'Glove, you can get ahead of Wall Street. This easy analysis, along with a bit of thought, could help you save yourself the heartache of seeing your investment get sharply cut when a company reports a "surprisingly" disappointing quarter.

The warning signs are often there ahead of time. This tool can help you see them.

To learn more about how we analyze companies, try our flagship investing newsletter, Motley Fool Stock Advisor, free for 30 days.

ONEOK Partners is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Fool analyst Jim Mueller doesn't own shares of any company mentioned. He works with the Fool's Stock Advisor newsletter service. The Motley Fool is investors writing for investors.