In business, inventory is an important part of the process. After the manufacturing process is completed and the product is ready to market or sell to the customers, a business is left with inventory.
What is the inventory buildup?
As an investor, you need to calculate the inventory level as a percentage of sales and compare that with multiple year numbers. Suppose inventory grows faster than sales. That should raise a red flag because it means the sales growth rate is slowing. To reduce the inventory, the company needs to offer higher discounts on their products which will affect the bottom-line earnings of the company.
In the retail business, you need to pay special attention to the inventory levels compared with those of previous years. If the inventory grows faster than sales for a particular product, it means customers might have lost interest in that product. The company needs to improve the product or sell at fire sale prices to reduce the inventory.
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