Synopses & Reviews
Praise for Financial Statement Analysis FOURTH EDITION"I love this book. It helps to develop the questioning mind—the mind of a financial detective. It teaches the art of skepticism and critical thinking. Readers go beyond definition and calculation and learn interpretation."
—Philip L. Cooley, PhD, Prassel Distinguished Professor of Business, Trinity University
"Over my decades of involvement with high-yield bonds, Marty Fridson has been the leading speaker of truth. As he so accurately states in Financial Statement Analysis, the credit investor is required to engage in a game of cat-and-mouse with company management's intent on minimizing their cost of capital by putting a positive gloss on their financial statements. The Fourth Edition of Marty's terrific book is the bible on how to detect and deal with these efforts."
—Howard Marks, Chairman, Oaktree Capital Management
"Financial Statement Analysis is a unique text; it combines great academic work with numerous real-life examples to form a highly useful reference for equity investors, debt holders, and investors who straddle both asset classes. Whether you are an investor, an investment advisor, or a teacher, Financial Statement Analysis will prove very valuable."
—Margaret M. Cannella, former head of Global Credit Research, J.P. Morgan and Adjunct Professor, Columbia Business School
"Marty has seen it all! He has had a front-row seat to see the birth, death, and rebirth of the high-yield bond market . . . several times over! In the Fourth Edition of Financial Statement Analysis, Marty clearly demonstrates that despite the enactment of Sarbanes-Oxley in 2002, and other attempts to curtail abuse of the system, one needs a critical analytical eye to be certain that management is not trying to obfuscate the truth. The case studies provide excellent and timely examples of some of the techniques that companies have used to mislead investors."
—Edward Z. Emmer, former global head of Corporate and Government Ratings and Equity Research, Standard & Poor's
"Those who read financial statements without understanding the strategic context in which they are written will land on the losing end of the gripping episodes with which bond-market legend Marty Fridson illustrates in the Fourth Edition of his classic reference, Financial Statement Analysis. And all of us who depend on the markets sending capital to its best use should hope that investors read this book first."
—David Musto, Professor of Finance, the Wharton School of the University of Pennsylvania
"This book rightly urges resolute skepticism when inspecting financial statements. Its great value, though, is in the plain-spoken stripping down of real-world and illustrative examples that show how to see past the numbers to the practicalities and incentives behind them—and so help analysts and journalists alike ask the right questions."
—Richard Beales, Assistant Editor, Reuters Breakingviews
Review
“Any book that reaches its 4th edition (updated to 2011) should be good. That's true in spades for Financial Statement Analysis. Fridson and Alvarez have written a classic. It should be required reading and a constant reference source on the bookshelf of any investor intending to buy individual company stocks or bonds.”–Canadian Financial DIY blog
Review
“Any book that reaches its 4th edition (updated to 2011) should be good. That's true in spades for
Financial Statement Analysis. Fridson and Alvarez have written a classic. It should be required reading and a constant reference source on the bookshelf of any investor intending to buy individual company stocks or bonds.”–Canadian Financial DIY blog
“In the 1990s, Benjamin Graham’s Security Analysis served as [Value Partners’] reference book, but since then they have been using Martin Fridson’s Financial Statement Analysis: A Practioner’s Guide.” - excerpt from The Value Investors: Lessons from the World's Top Fund Managers by Ronald Chan, Bruce C. N. Greenwald (Foreword)
Review
"
Financial Statement Analysis: A Practitioner's Guide is a well-organized, thorough exploration of the challenges facing practitioners who rely on financial statements to make investment and lending decisions. Reference books about accounting, while valuable for their insights, are seldom this enjoyable to read. This book is different because the authors seamlessly integrate fascinating real-life examples and instructive fictional scenarios into each chapter to illustrate their points. For anyone with a passing interest in the subject, or for new analysts learning the trade, F
inancial Statement Analysis is an amazing resource."
—
Christopher Shayne, CFA, Director of Product Operations for Enterprise Risk Solutions at Moody's Analytics
"Any book that reaches its 4th edition (updated to 2011) should be good. That's true in spades for Financial Statement Analysis. Fridson and Alvarez have written a classic. It should be required reading and a constant reference source on the bookshelf of any investor intending to buy individual company stocks or bonds."
—Canadian Financial DIY blog
"In the 1990s, Benjamin Graham's Security Analysis served as [Value Partners’] reference book, but since then they have been using Martin Fridson's Financial Statement Analysis: A Practioner's Guide."
—excerpt from The Value Investors: Lessons from the World's Top Fund Managers by Ronald Chan, Bruce C. N. Greenwald (Foreword)
Synopsis
An updated guide to the essential discipline of financial statement analysisIn Financial Statement Analysis, Fourth Edition, leading investment authority Martin Fridson returns with Fernando Alvarez to provide the analytical framework you need to scrutinize financial statements, whether you're evaluating a company's stock price or determining valuations for a merger or acquisition.
This fully revised and up-to-date Fourth Edition offers fresh information that will help you to evaluate financial statements in today's volatile markets and uncertain economy, and allow you to get past the sometimes biased portrait of a company's performance.
- Reflects changes in the financial reporting landscape, including issues related to the financial crisis of 2008-2009
- Provides guidelines on how to interpret balance sheets, income statements, and cash flow statements
- Offers information for maximizing the accuracy of forecasts and a structured approach to credit and equity evaluation
Filled with real-life examples and expert advice, Financial Statement Analysis, Fourth Edition will help you gain a firm understanding of the techniques that will help you interpret financial statements, which are designed to conceal more than reveal.
Synopsis
The updated, real-world guide to interpreting and unpacking GAAP and non-GAAP financial statements
In Financial Statement Analysis, 5th Edition, leading investment authority Martin Fridson returns with Fernando Alvarez to provide the analytical framework you need to scrutinize financial statements, whether you're evaluating a company's stock price or determining valuations for a merger or acquisition. Rather than taking financial statements at face value, you'll learn practical and straightforward analytical techniques for uncovering the reality behind the numbers. This fully revised and up-to-date 5th Edition offers fresh information that will help you to evaluate financial statements in today's volatile markets and uncertain economy. The declining connection between GAAP earnings and stock prices has introduced a need to discriminate between instructive and misleading non-GAAP alternatives. This book integrates the alternatives and provides guidance on understanding the extent to which non-GAAP reports, particularly from US companies, may be biased.
Understanding financial statements is an essential skill for business professionals and investors. Most books on the subject proceed from the questionable premise that companies' objective is to present a true picture of their financial condition. A safer assumption is that they seek to minimize the cost of raising capital by portraying themselves in the most favorable light possible. Financial Statement Analysis teaches readers the tricks that companies use to mislead, so readers can more clearly interpret statements.
- Learn how to read and understand financial statements prepared according to GAAP and non-GAAP standards
- Compare CFROI, EVA, Valens, and other non-GAAP methodologies to determine how accurate companies' reports are
- Improve your business decision making, stock valuations, or merger and acquisition strategy
- Develop the essential skill of quickly and accurately gathering and assessing information from financial statements of all types
Professional analysts, investors, and students will gain valuable knowledge from this updated edition of the popular guide. Filled with real-life examples and expert advice, Financial Statement Analysis, 5th Edition, will help you interpret and unpack financial statements.
Synopsis
Financial statement analysis is an essential skill for individuals involved in investment management, corporate finance, commercial lending, and the extension of credit. Over the years, it has become an increasingly complex endeavor, as corporate financial statements have become more difficult to decipher. But with the
Fourth Edition of Financial Statement Analysis, you'll learn how to handle the practical challenges that are part of the business.
Written by leading investment authority Martin Fridson and Columbia Graduate Business School Professor Fernando Alvarez, this reliable resource outlines the analytical framework needed to scrutinize financial statements, whether you're evaluating a company's stock price or determining valuations for a merger or acquisition. Fully revised to reflect new concerns and challenges in this field, the Fourth Edition of Financial Statement Analysis will put you in a better position to get past the sometimes biased portrait of a company's performance.
Divided into four comprehensive parts—Reading Between the Lines, The Basic Financial Statements, A Closer Look at Profits, and Forecasts and Security Analysis—this practical guide contains:
Insights that will allow you to evaluate financial statements effectively in volatile markets and an uncertain economy
Discussions on properly interpreting balance sheets, income statements, and cash flow statements
Valuable new case studies of fraudulent reporting
Tips for maximizing the accuracy of forecasts and a structured approach to credit and equity evaluation
Revelations about how earnings can be exaggerated or even fabricated
And much more
All too often, financial statements conceal more than they reveal. But by undertaking genuine, goal-oriented analysis—instead of simply going through the motions of calculating standard financial ratios—you can uncover the true financial condition of a company.
Filled with real-world examples and expertadvice, Financial Statement Analysis, Fourth Edition will help you excel at interpreting financial statements and enable you to use this information to make better business decisions.
About the Author
MARTIN FRIDSON is Global Credit Strategist at BNP Paribas Investment Partners, one of the world's largest asset managers. Over a twenty-five-year span with brokerage firms including Salomon Brothers, Morgan Stanley, and Merrill Lynch, he became known for his innovative work in credit analysis and investment strategy. Fridson has served as president of the Fixed Income Analysts Society, governor of the Association for Investment Management and Research (now CFA Institute), and director of the New York Society of Security Analysts.
FERNANDO ALVAREZ is currently an Adjunct Associate Professor of Finance and Economics at the Columbia University Graduate Business School, where he teaches entrepreneurship finance. From 2003 until 2008, he was associate professor in the Finance and Economics Department and director of entrepreneurship programs at Rutgers Business School, Newark and New Brunswick. Alvarez has taught at New York University's Stern School of Business where he was associate professor on innovation and entrepreneurship, and Babson College where he was assistant professor of finance.
Table of Contents
Preface to Fourth Edition xiAcknowledgments xv
PART ONE - Reading between the Lines
CHAPTER 1 - The Adversarial Nature of Financial Reporting 3
The Purpose of Financial Reporting 4
The Flaws in the Reasoning 8
Small Profits and Big Baths 11
Maximizing Growth Expectations 12
Downplaying Contingencies 18
The Importance of Being Skeptical 20
Conclusion 24
PART TWO - The Basic Financial Statements
CHAPTER 2 - The Balance Sheet 29
The Value Problem 30
Comparability Problems in the Valuation of Financial Assets 32
Instantaneous Wipeout of Value 34
How Good Is Goodwill? 35
Losing Value the Old-Fashioned Way 38
True Equity Is Elusive 40
Pros and Cons of a Market-Based Equity Figure 41
The Common Form Balance Sheet 43
Conclusion 45
CHAPTER 3 - The Income Statement 47
Making the Numbers Talk 47
How Real Are the Numbers? 52
Conclusion 77
CHAPTER 4 - The Statement of Cash Flows 79
The Cash Flow Statement and the
Leveraged Buyout 81
Analytical Applications 86
Cash Flow and the Company Life Cycle 87
The Concept of Financial Flexibility 99
In Defense of Slack 104
Conclusion 106
PART THREE - A Closer Look at Profits
CHAPTER 5 - What Is Profit? 111
Bona Fide Profits versus Accounting Profits 111
What Is Revenue? 112
Which Costs Count? 114
How Far Can the Concept Be Stretched? 116
Conclusion 117
CHAPTER 6 - Revenue Recognition 119
Channel-Stuffing in the Drug Business 119
A Second Take on Earnings 123
Astray on Layaway 127
Recognizing Membership Fees 128
A Potpourri of Liberal Revenue
Recognition Techniques 131
Fattening Earnings with Empty Calories 132
Tardy Disclosure at Halliburton 138
Managing Earnings with Rainy Day Reserves 141
Fudging the Numbers: A Systematic Problem 143
Conclusion 147
CHAPTER 7 - Expense Recognition 149
Nortel’s Deferred Profit Plan 149
Grasping for Earnings at General Motors 154
Time-Shifting at Freddie Mac 157
Conclusion 159
CHAPTER 8 - The Applications and Limitations of EBITDA 161
EBIT, EBITDA, and Total Enterprise Value 162
The Role of EBITDA in Credit Analysis 166
Abusing EBITDA 169
A More Comprehensive Cash Flow Measure 171
Working Capital Adds Punch to Cash
Flow Analysis 174
Conclusion 176
CHAPTER 9 - The Reliability of Disclosure and Audits 179
An Artful Deal 180
Death Duties 183
Systematic Problems in Auditing 184
Conclusion 189
CHAPTER 10 - Mergers-and-Acquisitions Accounting 191
Maximizing Postacquisition Reported Earnings 191
Managing Acquisition Dates and Avoiding Restatements 195
Conclusion 197
CHAPTER 11 - Is Fraud Detectable? 199
Telltale Signs of Manipulation 199
Fraudsters Know Few Limits 201
Enron: A Media Sensation 201
HealthSouth’s Excruciating Ordeal 210
Milk and Other Liquid Assets 217
Conclusion 221
PART FOUR - Forecasts and Security Analysis
CHAPTER 12 - Forecasting Financial Statements 225
A Typical One-Year Projection 225
Sensitivity Analysis with Projected Financial Statements 237
Projecting Financial Flexibility 242
Pro Forma Financial Statements 245
Pro Forma Statements for Acquisitions 246
Multiyear Projections 253
Conclusion 263
CHAPTER 13 - Credit Analysis 265
Balance Sheet Ratios 266
Income Statement Ratios 275
Statement of Cash Flows Ratios 280
Combination Ratios 283
Relating Ratios to Credit Risk 290
Conclusion 304
CHAPTER 14 - Equity Analysis 307
The Dividend Discount Model 308
The Price-Earnings Ratio 313
Why P/E Multiples Vary 316
The Du Pont Formula 324
Valuation through Restructuring Potential 328
Conclusion 334
APPENDIX - Explanation of Pro Forma Adjustments for Hertz Global Holdings, Inc./DTG 335
Notes 341
Glossary 353
Bibliography 367
About the Authors 369
Index 371