Financial Statement Analysis

Financial Statement Analysis : A Practitioner's Guide

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An updated guide to the essential discipline of financial statement analysis In 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.
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Product details

  • Hardback | 400 pages
  • 165 x 317 x 28mm | 622g
  • New York, United States
  • English
  • 4th Edition
  • 0470635606
  • 9780470635605
  • 87,033

Flap copy

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.
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Back cover copy

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
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Table of contents

Preface to Fourth Edition xi Acknowledgments 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
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About Martin S. Fridson

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.
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