Financial Statement Analysis A Practitioner's Guide

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  • Edition: 4th
  • Format: Hardcover
  • Copyright: 2011-07-05
  • Publisher: Wiley

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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 evaluationFilled 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.

Author Biography

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 Editionp. xi
Acknowledgmentsp. xv
Reading between the Lines
The Adversarial Nature of Financial Reportingp. 3
The Purpose of Financial Reportingp. 4
The Flaws in the Reasoningp. 8
Small Profits and Big Bathsp. 11
Maximizing Growth Expectationsp. 12
Downplaying Contingenciesp. 18
The Importance of Being Skepticalp. 20
Conclusionp. 24
The Basic Financial Statements
The Balance Sheetp. 29
The Value Problemp. 30
Comparability Problems in the Valuation of Financial Assetsp. 32
Instantaneous Wipeout of Valuep. 34
How Good Is Goodwill?p. 35
Losing Value the Old-Fashioned Wayp. 38
True Equity Is Elusivep. 40
Pros and Cons of a Market-Based Equity Figurep. 41
The Common Form Balance Sheetp. 43
Conclusionp. 45
The Income Statementp. 47
Making the Numbers Talkp. 47
How Real Are the Numbers?p. 52
Conclusionp. 77
The Statement of Cash Flowsp. 79
The Cash Flow Statement and the Leveraged Buyoutp. 81
Analytical Applicationsp. 86
Cash Flow and the Company Life Cyclep. 87
The Concept of Financial Flexibilityp. 99
In Defense of Slackp. 104
Conclusionp. 106
A Closer Look at Profits
What Is Profit?p. 111
Bona Fide Profits versus Accounting Profitsp. 111
What Is Revenue?p. 112
Which Costs Count?p. 114
How Far Can the Concept Be Stretched?p. 116
Conclusionp. 117
Revenue Recognitionp. 119
Channel-Stuffing in the Drug Businessp. 119
A Second Take on Earningsp. 123
Astray on Layawayp. 127
Recognizing Membership Feesp. 128
A Potpourri of Liberal Revenue Recognition Techniquesp. 131
Fattening Earnings with Empty Caloriesp. 132
Tardy Disclosure at Halliburtonp. 138
Managing Earnings with Rainy Day Reservesp. 141
Fudging the Numbers: A Systematic Problemp. 143
Conclusionp. 147
Expense Recognitionp. 149
Nortel's Deferred Profit Planp. 149
Grasping for Earnings at General Motorsp. 154
Time-Shifting at Freddie Macp. 157
Conclusionp. 159
The Applications and Limitations of EBITDAp. 161
EBIT, EBITDA, and Total Enterprise Valuep. 162
The Role of EBITDA in Credit Analysisp. 166
A busing EBITDAp. 169
A More Comprehensive Cash Flow Measurep. 171
Working Capital Adds Punch to Cash Flow Analysisp. 174
Conclusionp. 176
The Reliability of Disclosure and Auditsp. 179
An Artful Dealp. 180
Death Dutiesp. 183
Systematic Problems in Auditingp. 184
Conclusionp. 189
Mergers-and-Acquisitions Accountingp. 191
Maximizing Postacquisition Reported Earningsp. 191
Managing Acquisition Dates and Avoiding Restatementsp. 195
Conclusionp. 197
Is Fraud Detectable?p. 199
Telltale Signs of Manipulationp. 199
Fraudsters Know Few Limitsp. 201
Enron: A Media Sensationp. 201
HealthSouth's Excruciating Ordealp. 210
Milk and Other Liquid Assetsp. 217
Conclusionp. 221
Forecasts and Security Analysis
Forecasting Financial Statementsp. 225
A Typical One-Year Projectionp. 225
Sensitivity Analysis with Projected Financial Statementsp. 237
Projecting Financial Flexibilityp. 242
Pro Forma Financial Statementsp. 245
Pro Forma Statements for Acquisitionsp. 246
Multiyear Projectionsp. 253
Conclusionp. 263
Credit Analysisp. 265
Balance Sheet Ratiosp. 266
Income Statement Ratiosp. 275
Statement of Cash Flows Ratiosp. 280
Combination Ratiosp. 283
Relating Ratios to Credit Riskp. 290
Conclusionp. 304
Equity Analysisp. 307
The Dividend Discount Modelp. 308
The Price-Earnings Ratiop. 313
Why P/E Multiples Varyp. 316
The Du Pont Formulap. 324
Valuation through Restructuring Potentialp. 328
Conclusionp. 334
Appendix: Explanation of Pro Forma Adjustments for Hertz Global Holdings, Inc./DTGp. 335
Notesp. 341
Glossaryp. 353
Bibliographyp. 367
About the Authorsp. 369
Indexp. 371
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