How to value inventory

Inventory is the stock a company holds to sell. It's a current asset because it's meant to become cash within the year.

Inventory days is how long stock sits before it's sold. Inventory divided by cost of goods sold times 365. It's the number that tells you whether a company is efficient or drowning in stuff.

FIFO and LIFO are the two ways to decide which cost to count when a unit is sold. First in first out counts the oldest cost. Last in first out counts the newest. When prices are rising LIFO shows a higher cost and a lower profit. It's a choice and the company states it in the notes.

Costco and Apple. In millions.

Derived. Costco. $16,651 million divided by $212,586 million is 0.0783. Times 365 is 28.6 days. Apple. $6,331 million divided by $214,137 million is 0.0296. Times 365 is 10.8 days.

Costco turns its warehouse over about every four weeks. That's fast for a retailer. Apple holds under two weeks of product. It builds what's ordered and ships it.

Costco's 10-K states that its US inventories are valued using LIFO. In a year of rising prices that lowers reported profit and lowers tax. It's one reason two retailers with the same shelves can report different margins.

The trap is reading inventory growth as sales growth.

Stock rising faster than sales means stock is piling up. It's the earliest warning that products aren't moving. Costco's inventory fell from $17,907 million to $16,651 million in a year when sales rose. That's the good direction.

The other trap is the write-down. When stock can't be sold at cost the company cuts its value and the cut hits the P&L as a cost. A company with old inventory and no write-downs is a company with a profit that's too high.