Stock values rise and fall for a variety of reasons. One reason considers economic news, such as changes in the unemployment rate or increases in inflation. Another reason involves the financial reporting of the company. Corporations release their earnings data each quarter. The earnings data communicates the revenues and expenses for that period. As company earnings increase, investors are willing to pay more for each share of stock. When the company reduces its inventory, it records that reduction as an expense. Expenses reduce the net income of the company, and the value for stockholders.
1. Locate the beginning inventory balance in the balance sheet for the prior year. Review the asset section to find the inventory balance. Inventory appears in the current asset section.
2. Locate the ending inventory balance by reviewing the balance sheet for the current year. Review the asset section to find the inventory balance.
3. Calculate the amount of inventory reduction by subtracting the ending inventory from the beginning inventory. The inventory reduction amount equals the reduction in company earnings.
4. Locate the number of outstanding number of shares of common stock. The current year balance sheet lists the common stock in the stockholder equity section. The notes to the balance sheet indicates the number of outstanding shares of common stock.
5. Calculate impact on earnings per share. Divide the inventory reduction by the number of outstanding shares. This determines the total change in net income for each share of outstanding stock. As the earnings per share decreases, the value of the stock also decreases.
- Stock value rises and falls for a variety of reasons, do not assume that a change in stock value occurs for one specific reason.
- There are usually several factors occurring at the same time which impact the stock value.
- Some companies want to reduce the amount of cash tied up with the high level of inventory. Other companies experience financial challenges and lack sufficient credit to purchase more inventory.
- Inventory reduction can trigger changes in other financial accounts other than inventory. For example, if inventory decreases as a result of increased sales, the revenues also increase. An increase in revenue leads to an increase in earnings per share.
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