Lesson 5 of 8
The longest process on a balance sheet
Land and homes under construction as a stage of production a reader can price. One filer's inventory, thirteen filed years, and what it is three quarters of.
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
- A homebuilder's inventory is land, development work and homes under construction, which is a stage of production carried at cost on a balance sheet.
- At one filer it is roughly three quarters of total assets, so the balance sheet is mostly one long unfinished process.
- The write-down line is the only part of it that is marked down, and it is disclosed each year.
The structure course draws an economy as stages, with a value at each. Most balance sheets do not let you see one. A homebuilder's does, because its inventory is the process itself.
One filer's inventory, seven filed fiscal years
- FY20197,873$m
- FY20207,659$m
- FY20217,916$m
- FY20228,733$m
- FY20239,058$m
- FY20249,713$m
- FY202510,678$m
What the line contains
Land held for future development, land under development, and homes under construction, all carried at cost. Some of it was bought years before any house on it was started. Some of it will not be finished for years more.
That is a production process with a length, sitting on a balance sheet in dollars, which is as close as the accounts come to the thing the structure of production course draws.
How much of the balance sheet it is
At the filer above, in the fiscal year ended 31 October 2025, inventory was 10,678 million dollars against total assets of 14,520 million. That is 73.5 percent. Net property, plant and equipment in the same filing was 273 million, or 1.9 percent.
So almost three quarters of this balance sheet is an unfinished process and less than two percent is the plant that carries it out. It is the opposite shape from the semiconductor filer used earlier in this course, and the capital intensity course is built on exactly that contrast.
The line that gets marked down
Inventory is carried at cost and written down when it will not recover that cost. The write-down is disclosed and is the one part of this stage that gets repriced without a sale.
What the same line looked like before
The company's filed record reaches back far enough to contain a housing downturn. Homebuilding revenue as reported in the annual report for fiscal 2010 was 3,148 million dollars for fiscal 2008, 1,755 million for fiscal 2009 and 1,495 million for fiscal 2010: a fall of 52.5 percent across two fiscal years. Those three figures come from the fiscal 2010 annual report, accession 0000950123-10-115566, filed 22 December 2010, rather than from the original filings for each year, which is a distinction the ten-years table lesson in the applied course insists on for good reason.
What a reader cannot get from that is a lesson about what happens next. Two episodes are not a test, and the two contractions lesson in the bust course is explicit about why.
Check yourself
What does a homebuilder's inventory line contain?
- Finished homes only
- Land held for development, land under development, and homes under construction, all carried at cost
- Land at fair value and homes at cost
Show the answer
Answer: B.
It is the production process itself, carried at cost, which is why it can run to three quarters of total assets.Inventory was 10,678 million against total assets of 14,520 million, with net property, plant and equipment of 273 million. What shape of balance sheet is that?
- A capital-intensive one, dominated by plant
- One where 73.5 percent is an unfinished process and 1.9 percent is the plant that carries it out
- One dominated by receivables
Show the answer
Answer: B.
It is the opposite shape from a semiconductor manufacturer, and the capital intensity course is built on that contrast.A filer records inventory write-downs of about 0.6 percent of inventory in each of two consecutive years. What should a reader conclude?
- That the inventory is impaired and the company is in difficulty
- That write-downs at this scale are a normal feature of holding land, and the ratio is worth watching over more years than two
- That the carrying value is overstated
Show the answer
Answer: B.
Treating any write-down as a signal means reacting to something that happens every year. The ratio between the stock and the charge is the thing to watch.Sources
- Toll Brothers, Inc., annual reports on Form 10-K for fiscal years 2019 through 2025, for inventory and inventory write-downs; fiscal 2025 accession 0000794170-25-000112, filed 19 December 2025.
- Toll Brothers, Inc., annual report on Form 10-K for the fiscal year ended 31 October 2010, accession 0000950123-10-115566, filed 22 December 2010, for homebuilding revenue for fiscal 2008, 2009 and 2010 as reported in that filing.
- ASC 330, Inventory, for carrying at cost and for the write-down when cost will not be recovered.
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.
- The fiscal 2008 to 2010 revenue figures are taken from a later filing's comparatives rather than from each year's own annual report, which is why the accession is stated. A figure labelled only by year does not say which version of it you have.
- Inventory carried at cost is not a market value. A write-down reduces it towards recoverable amount; nothing writes it up.
- Nothing here is a view on Toll Brothers or on any security.