Inventory divided by cost of goods sold times 365; how long stock sits before it is sold.
Lengthening inventory days signals either deliberate stockpiling or unsold product. The distinction matters: a company building safety stock ahead of a supply disruption is doing something sensible, while one whose finished goods are piling up faces discounts and gross-margin pressure.
Because production costs are capitalised into inventory until sale, a company can hold margins up for a quarter or two by building stock, which is why this measure is a core earnings-quality check.
Example: Northwind Tools holds $265M of inventory against $470M of COGS, 206 days. Finished goods alone rose 26% against 8% revenue growth, so a discount cycle looks likely.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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