Lesson 4 of 8
Inventory that grows alone
The clearest signature in the accounts: an inventory build measured against a revenue fall, in filed years, and what days of inventory adds.
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
- Inventory rising while revenue falls is the most legible signature in the accounts, because both halves are on the face of the statements.
- Read it as days of inventory rather than as a percentage change, because days put the two movements into one number.
- A high days figure is a fact about a date and says nothing about whether the goods will sell.
Of the six translations in this course, this is the one a reader can do fastest and get most from, because both numbers are on the face of the statements and neither needs a note.
Inventory and revenue at one filer, four filed fiscal years
- Revenue
- Inventory at year end
Show the numbers
| Revenue | Inventory at year end | |
|---|---|---|
| FY22 | 30,758$m | 6,663$m |
| FY23 | 15,540$m | 8,387$m |
| FY24 | 25,111$m | 8,875$m |
| FY25 | 37,378$m | 8,355$m |
The movement, stated exactly
Between fiscal 2022 and fiscal 2023 at the filer above, inventory rose from 6,663 million dollars to 8,387 million, an increase of 1,724 million or 25.9 percent. Revenue over the same two fiscal years fell from 30,758 million to 15,540 million, a decrease of 15,218 million or 49.5 percent.
Inventory as a share of that year's revenue therefore went from 21.7 percent to 54.0 percent. More than half a year of sales was sitting on the balance sheet at the end of fiscal 2023, against roughly a quarter of a year twelve months earlier.
Why days of inventory is the better instrument
A percentage change in inventory and a percentage change in revenue are two numbers, and holding both in your head while comparing companies does not work. Days of inventory outstanding puts them into one: inventory divided by cost of revenue, times 365. It is what ValueScreener stores as days inventory outstanding, and it is a component of the cash conversion cycle the financial health course teaches.
A rise in days can come from either half. More goods at the same rate of sale, or the same goods at a slower rate. The ratio does not distinguish them, and for the question this course is asking, it does not need to: both mean goods are sitting longer.
What the ordinary explanations are
A product transition, where old stock is held while new stock is built. A deliberate build ahead of a contract. A supply agreement that obliges purchases regardless of demand. A change in cost flow assumption, which the accounting standards course covers and which moves the carrying value without moving a single unit. And write-downs not yet taken, which reduce the carrying value when they arrive and make the following year look better for a reason that is not trading.
Each of those produces the same two numbers. That is why the reading produces a figure to watch rather than a conclusion, and why the eighth lesson of this course exists.
Check yourself
Inventory rose 25.9 percent while revenue fell 49.5 percent. What happened to inventory as a share of revenue?
- It rose by about 25 percent
- It went from 21.7 percent to 54.0 percent, because both halves moved against each other
- It stayed roughly flat
Show the answer
Answer: B.
A numerator rising a quarter over a denominator falling a half more than doubles the ratio. Neither movement alone would have done it.Why is days of inventory preferred to a percentage change?
- Because it is audited separately
- Because it puts the movement in goods and the movement in sales into one number
- Because it removes the effect of cost flow assumptions
Show the answer
Answer: B.
It does not remove cost flow effects. It combines the two movements, which is what makes it comparable across years and companies.What does a high days-of-inventory reading establish?
- That the goods will be written down
- That at that date the goods represented more days of sale than before, and nothing about whether they later sold
- That demand has fallen
Show the answer
Answer: B.
It is a fact about a date. At the filer above, the following year's inventory rose again while revenue recovered, which is neither of the two patterns a reader might expect.Sources
- Micron Technology, Inc., annual reports on Form 10-K for fiscal years 2022 through 2025, for revenue and inventory: fiscal 2022 accession 0000723125-22-000048 filed 7 October 2022; fiscal 2023 accession 0000723125-23-000054 filed 6 October 2023; fiscal 2024 accession 0000723125-24-000027 filed 4 October 2024; fiscal 2025 accession 0000723125-25-000028 filed 3 October 2025.
- ASC 330, Inventory, for measurement and for the cost flow assumptions that move a carrying value without moving a unit.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- Inventory as a share of revenue divides a balance at one instant by a flow over twelve months. It is a rough instrument and days of inventory against cost of revenue is the better one.
- Four fiscal years at one company is an illustration of a reading. It is not evidence about any theory.
- Nothing here is a view on Micron or on any security.