Business Sales Outpace Inventory Growth
American businesses added stock in August, but sales grew faster. That is a welcome development for lenders: merchandise is more useful to a borrower’s finances when it sells than when it sits on a shelf collecting storage and interest costs.
The Census Bureau’s report, released Thursday at 10 a.m. Eastern, showed business inventories rising 0.4%, following July’s revised 0.9% increase. Sales rose 1.1%. The stock on hand represented 1.33 months of sales, down from 1.34 in July and 1.40 a year earlier. These are seasonally adjusted dollar values, without an adjustment for inflation.
We like the direction, particularly for business development companies in the Fly High universe. These lenders need borrowers to turn operating activity into enough cash to pay interest. When sales outpace inventory growth, a business may need less additional money tied up in stock for each dollar of sales. That can ease its need for short-term borrowing and leave more room for interest payments, provided customers pay and profit margins hold.
The detail prevents us from calling this a broad improvement in borrower health. Retailers’ inventory-to-sales ratio fell to 1.36 from 1.38, while manufacturers’ ratio edged up to 1.48 from 1.47. Manufacturers’ sales were essentially flat as their stocks increased. A lender financing a factory could therefore face a different earnings picture from one financing a retailer or wholesaler.
Nor does a lower ratio prove that goods moved faster in physical terms. Changes in prices and the mix of products can influence the comparison. The report measures August activity, so it cannot establish how businesses handled subsequent costs or whether any particular borrower has paid down debt.
For retail property owners, healthier tenant cash flow could help rent collection and lease renewals over time. For credit funds, stronger borrower payments would support investment income, but a fund’s distribution still depends on its own expenses, financing and payment policy. This report establishes neither higher rental earnings nor better distribution coverage.
The useful next test is in company results: are inventories staying proportionate to sales, customers paying on time and operating cash covering interest? We would welcome that combination. Rising stock alongside weaker sales and heavier borrowing would change our view. Today’s figures offer modest encouragement, with the manufacturing detail keeping the optimism measured.
Sources
- U.S. Census Bureau: August manufacturing and trade inventories and sales, released October 15
- Reuters: Business inventories rise moderately in August, October 15
This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.