Are Inventories Accretive? Lessons from Inventory and Earnings Relationship in the U.S. Capital Goods Sector

Abstract

I present results documenting the effects of inventories (considered as current assets) on corporate earnings in the US capital goods industry. The results reveal that inventories may have a negative impact on corporate earnings. Therefore, shareholder wealth may be negatively impacted by carrying inventories in US capital goods sector. Carrying inventories may be crowding out non-inventory assets. Interestingly, higher inventories may lead to depressed overall sales. Depressed overall sales may contribute to further reduction in non-inventory assets. This reduction in non-inventory assets may further result in lower corporate earnings. These significant results strengthen the need for optimal inventory management and also call for a more nuanced treatment of inventories in the standard accounting literature. The results also strengthen the popular rationale for lean supply chain management. This paper contributes to the literature on the close relationship between operational efficiency and corporate financial outcomes.