When inventories rise faster than sales, there’s likely to be trouble on the horizon. Sometimes the buildup is just temporary as a company prepares for a new product launch, but that’s usually more the exception than the rule. When a company produces more than it’s selling, either demand has dried up or the company has been overly ambitious in forecasting demand. In any case, the unsold goods will have to get sold eventually—probably at a discount—or written off, which would result in a big charge to earnings.
