Inventory

Goods held for sale, plus the raw materials and work in progress that will become them. It is measured at the lower of cost and net realisable value, which means a write-down is required as soon as the market price falls below what the goods cost to make.

The distributor with ₹3,900 crore of cost of goods sold and ₹780 crore of inventory is holding about 73 days of stock.

Inventory is the most judgement-laden line on the balance sheet. Deciding that slow-moving stock is still worth its cost keeps profit high this year and creates a larger write-down later. Rising inventory days alongside rising revenue is the classic setup for that write-down.

The split between raw materials, work in progress and finished goods is disclosed and is worth ten seconds of attention because the three mean different things. Raw material building up is a purchasing decision, sometimes a sensible one ahead of a price rise. Work in progress building up points at a production bottleneck. Finished goods building up is the one that matters most, because it means the company made things that nobody has bought, and it is the component that leads a demand disappointment by a quarter or two.

For a pharmaceutical or fashion business, ask how much of the stock will still be saleable in twelve months.