The photovoltaic (PV) industry chain experiences significant price volatility, with manufacturing facing pressure from both ends. When upstream raw material prices decline, high-cost inventory must be written down. Simultaneously, when downstream module prices fall, finished product selling prices drop accordingly. When write-downs occur at both ends in the same quarter, profit declines often exceed linear expectations.
I. Inventory Valuation Method Selection
Weighted Average and FIFO yield significantly different results during unidirectional price fluctuations. Neither method is inherently correct or incorrect, but consistency must be maintained. Additionally, financial reports should disclose how declining prices impact cost of goods sold; otherwise, fluctuations in gross margin cannot be explained.
II. Allowance for decline in value must be reviewed in two parts
Raw materials are measured at the lower of net realizable value and cost. For finished goods, it is also necessary to consider whether order prices are locked. Inventory with long-term fixed-price contracts carries fundamentally different risks than spot inventory; combining them for impairment assessment can lead to overestimation or underestimation of risk.
III. Capacity Cycle and Utilization
Industry capacity expansion typically lags behind price signals. When prices are high, companies expand capacity; by the time new capacity comes online, prices have already declined. Lower utilization rates then drive up unit fixed costs. On financial statements, this cycle manifests as a simultaneous downturn in revenue, gross margin, and rising unit costs.
IV. Prioritize Cash Flow
In a downturn, operating cash flow is a better indicator of survival than net income. Include days inventory outstanding, days sales outstanding, and capital expenditures on the first page of your monthly business review.
Cycles won't disappear with more precise management, but it gives companies options even at the trough.