Lesson 6 of 7
What this record cannot settle
The counterweight. What nine filed years do not contain, which at a business driven by land, rates and permitting is most of what decides the next decade.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Nine filed years settle what happened. They settle almost nothing about why, and nothing about what the business is worth.
- At this filer the largest unsettled questions are about land, about permitting and about demand, and none of the three is a reported figure.
- A list of what is unsettled is part of the output, not an admission that the work failed.
Five lessons of arithmetic, and this one is the counterweight that makes them honest. It is the shortest lesson in the course and the one most worth reading twice.
What the record settles, and what it leaves open
Settled by the filings
- What revenue, margins and cash flow were, in each of nine years.
- What the maturity schedule said at each year end.
- How much capital is tied up in inventory, and how the write-downs ran.
Not settled by anything filed
Most of the answer
- What the land was actually worth at any date.
- How long permitting takes and whether that is changing.
- What demand does, and at what price.
- Whether the margin came from mix, price or cost.
The left column is arithmetic on filed statements. The right column decides more of the outcome than the left one does.
The land is carried at cost
Inventory is 10,678.5 million dollars, or 73.5 percent of total assets, and it is carried at cost less any write-down. Cost is what was paid, in the year it was paid, which at a business that buys land years before building on it is a number from a different market.
Nothing in the filings says what that land is worth now. The write-down line says what has been recognised as not recoverable, which was 65.9 million dollars in fiscal 2025, or 0.62 percent of the stock. That is a statement about what accounting has recognised, not a valuation of the land.
The operating cycle runs outside the accounts
The time from buying land to closing a house includes entitlement, permitting and construction. How long each takes, and whether it is getting longer, decides how much capital is tied up and for how long. None of it is a reported figure, and it varies by jurisdiction.
The accounts report the consequence, in inventory and in days, several years after the cause.
The margin does not decompose
Operating margin rose from 7.77 percent in fiscal 2020 to 18.81 percent in fiscal 2024 and then fell to 15.69 percent. That is in the table.
Whether the rise came from higher prices, from a shift towards more expensive homes, from cheaper land bought earlier, or from less capitalised interest flowing through cost of sales, is not in the table and is not separately disclosed. Four explanations, one number, and the filings do not choose.
Why the list is output rather than apology
Because it is what tells a reader where the remaining work is, and because it is what stops a conditions document being written on a figure whose movement nobody understands.
The next lesson writes conditions. Every item on the right-hand list above is a reason a condition on some tempting figure would be a condition on something the reader cannot interpret when it breaks.
Check yourself
What does the inventory line tell you about the value of the land?
- Its current market value
- What was paid for it, less any write-down recognised, which at a business buying land years ahead is a number from a different market
- Its value in a liquidation
Show the answer
Answer: B.
The write-down line says what accounting has recognised as not recoverable. That is not a valuation of the land.Gross margin rose 7.83 percentage points over four years. What do the filings establish about why?
- That prices rose faster than costs
- Nothing conclusive: at least four explanations are consistent with the figures and the statements do not decompose the margin
- That the product mix shifted
Show the answer
Answer: B.
The management discussion addresses some of them in narrative terms, and narrative is not a decomposition.Why is this list part of the output rather than an admission of failure?
- Because it shows the work was thorough
- Because it says where the remaining work is, and stops conditions being written on figures the reader could not interpret if they broke
- Because it is required by the disclaimer
Show the answer
Answer: B.
Every item on it is a reason some tempting figure would make a poor condition, which is exactly what the next lesson needs to know.Sources
- Toll Brothers, Inc., annual reports on Form 10-K for fiscal years 2020 and 2024, accessions 0000794170-20-000066 and 0000794170-24-000051, for gross margin, and for fiscal 2025, accession 0000794170-25-000112, for inventory, total assets and the inventory write-down.
What this leaves out
- The list of what is unsettled is the list this course reached. It is not a proof that nothing else is missing, and a reader with industry knowledge will add to it.
- The four explanations offered for the margin movement are four that are consistent with the figures. Offering four is not a claim that there are only four.
- Nothing in this lesson is resolved by more arithmetic on the same statements, which is the reason it exists.
- Nothing here is a view on Toll Brothers or on any security.