Impact of Increased Inventory Levels on Working Capital

Very Hard Working Capital Management Inventory Management

Global Electronics Inc., a multinational corporation engaged in the manufacturing of consumer electronics, is evaluating its inventory management strategy. The company's financial officer is concerned about the rising levels of inventory and their impact on working capital. Currently, Global Electronics maintains a just-in-time (JIT) inventory system that aims to minimize inventory holding costs. In recent months, the company has faced uncertainties in supply chain deliveries, leading to stockouts for key products.

The financial officer is considering whether to enhance the inventory levels to create a buffer against these disruptions. She requests a detailed analysis of how this decision might impact cash flows, return on equity (ROE), and overall profitability. Which of the following statements best describes the potential consequences of increasing inventory levels from a working capital perspective?

Increasing inventory levels may enhance customer satisfaction and sales in the short term, but may also lead to higher holding costs and reduced liquidity.

Increasing inventory levels will have no impact on cash flows, as it will be a neutral event in terms of working capital.

Increasing inventory levels could potentially increase return on equity (ROE) without affecting profitability, as long as sales volumes increase.

Hint

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