Bust The Tipsters! - Case #2: The Case of The Mile-High Chips

Bust The Tipsters!

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Case #2: The Case of The Mile-High Chips
By DavidWolpe
The steel door clanged shut behind me almost as loud as the jackhammer pounding inside my head. I should know by now that you don't mix Scotch and tequila if you're working the next day. There's always a next day. Too bad. Today was it.
I was on assignment for an heiress out of Santa Rosa, California. She was thinking of sinking a pile of dough into this high-tech Megaherzed-out whiz-kid-run company -- The Mile High Chip Company -- if she thought she could make it multiply five- or ten-fold. I guess that's the way you think when you have that kind of dough.
Dough. Lettuce. Cabbage. I never met a Dead President I didn't like.
It wasn't her idea. Dr. Mortimer Stocktout put the thought in her head. I didn't like him. Didn't like the way he called himself a 'consultant.' Didn't like the cut he'd take if she made the investment. And I didn't like the way, now, touring the Mile-High Chip factory, he stuck to my elbow like a cheap jacket patch.
He said I had to wear the mask and the body suit and the gloves because they couldn't risk ruining the sterilized integrated circuits. I said I understood. It wasn't the first time someone told me I wasn't clean enough for the joint.
"Look through the microscope, if you like," he said, as we came to a stop next to some kind of magnifying gizmo. I looked. I didn't tell him I couldn't focus on his face, much less a few molecules. I grunted and straightened up.
Next stop was the warehouse. It was big as Rhode Island and tall as Mt. Kilimanjaro. It was jam-packed with boxes. I was impressed.
"As you can see," Stocktout said, "Mile High doesn't have any problem meeting demand."
"OK," I said. "I guess I've seen enough." We were buying in.
I don't know if it was the fumes or the mask or the height of the shelves, but the world started to spin. I heard a ringing in my ears. And then that ringing turned to a jingling. The jingling of a bell cap. This jester guy appeared in front of me.
"Hi there," he said. "I'm the Motley Fool." I knew it was time to check in to Betty Ford.
"A lot of inventory is not necessarily a good sign of a company's health," said the Fool. This is because:
1. Inventory ties up capital
2. Too much inventory represents a failure to convert products into cash.
3. Supply may be outstripping demand
4. All of the above.

The Answer is 4. All of the above.
The Fool continued, "While it is a good thing for a company to be able to make as much of a product as the market demands, too much of a good thing is, well, too much of a good thing. Kind of like that extra glass of scotch that started your head pounding in the first place...
"Inventory represents finished or near-finished products that Mile-High Chips has not yet sold. It's considered an asset because it represents money that the company would receive if it were liquidated, but from an investor's point of view it's more like a liability. Why? Because it represents a momentary failure on the company's part to convert its business into cash.
"What you as an investor need to track is how the growth in inventory tracks against overall sales growth. You'd ideally like to see this growth rate decline in comparison to the sales growth rate, or, if that's not possible, for the rates to remain about in sync. That way you know that the company is doing a good job in supplying the market without allowing those goods to sit on the shelves too long."
You live and learn. That's okay. Me? I'm going home to sleep it off.

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RULES & PRIZES \| HEROES & VILLAINS \| STANDINGS \| ARCHIVE
Case #2: The Case of The Mile-High Chips By DavidWolpe The steel door clanged shut behind me almost as loud as the jackhammer pounding inside my head. I should know by now that you don't mix Scotch and tequila if you're working the next day. There's always a next day. Too bad. Today was it. I was on assignment for an heiress out of Santa Rosa, California. She was thinking of sinking a pile of dough into this high-tech Megaherzed-out whiz-kid-run company -- The Mile High Chip Company -- if she thought she could make it multiply five- or ten-fold. I guess that's the way you think when you have that kind of dough. Dough. Lettuce. Cabbage. I never met a Dead President I didn't like. It wasn't her idea. Dr. Mortimer Stocktout put the thought in her head. I didn't like him. Didn't like the way he called himself a 'consultant.' Didn't like the cut he'd take if she made the investment. And I didn't like the way, now, touring the Mile-High Chip factory, he stuck to my elbow like a cheap jacket patch. He said I had to wear the mask and the body suit and the gloves because they couldn't risk ruining the sterilized integrated circuits. I said I understood. It wasn't the first time someone told me I wasn't clean enough for the joint. "Look through the microscope, if you like," he said, as we came to a stop next to some kind of magnifying gizmo. I looked. I didn't tell him I couldn't focus on his face, much less a few molecules. I grunted and straightened up. Next stop was the warehouse. It was big as Rhode Island and tall as Mt. Kilimanjaro. It was jam-packed with boxes. I was impressed. "As you can see," Stocktout said, "Mile High doesn't have any problem meeting demand." "OK," I said. "I guess I've seen enough." We were buying in. I don't know if it was the fumes or the mask or the height of the shelves, but the world started to spin. I heard a ringing in my ears. And then that ringing turned to a jingling. The jingling of a bell cap. This jester guy appeared in front of me. "Hi there," he said. "I'm the Motley Fool." I knew it was time to check in to Betty Ford. "A lot of inventory is not necessarily a good sign of a company's health," said the Fool. This is because: 1. Inventory ties up capital 2. Too much inventory represents a failure to convert products into cash. 3. Supply may be outstripping demand 4. All of the above.
The Answer is 4. All of the above. The Fool continued, "While it is a good thing for a company to be able to make as much of a product as the market demands, too much of a good thing is, well, too much of a good thing. Kind of like that extra glass of scotch that started your head pounding in the first place... "Inventory represents finished or near-finished products that Mile-High Chips has not yet sold. It's considered an asset because it represents money that the company would receive if it were liquidated, but from an investor's point of view it's more like a liability. Why? Because it represents a momentary failure on the company's part to convert its business into cash. "What you as an investor need to track is how the growth in inventory tracks against overall sales growth. You'd ideally like to see this growth rate decline in comparison to the sales growth rate, or, if that's not possible, for the rates to remain about in sync. That way you know that the company is doing a good job in supplying the market without allowing those goods to sit on the shelves too long." You live and learn. That's okay. Me? I'm going home to sleep it off.