By Martin Fridson, Fernando Alvarez
Compliment for financial plan AnalysisA Practitioner's GuideThird Edition"This is an illuminating and insightful journey of monetary statements, how they are often used to notify, how they are often used to lie to, and the way they are often used to research the monetary overall healthiness of a company."-Professor Jay O. mild Harvard enterprise School"Financial assertion research can be required examining for an individual who places a dime to paintings within the securities markets or recommends that others do the same."-Jack L. Rivkin government vice chairman (retired)Citigroup Investments"Fridson and Alvarez offer a necessary useful consultant for realizing, examining, and significantly assessing monetary experiences positioned out through corporations. Their dialogue of profits-'quality of earnings'-is rather insightful given the hot spate of reporting difficulties encountered by way of companies. I hugely suggest their ebook to an individual drawn to getting in the back of the numbers as a method of predicting destiny gains and inventory prices."-Paul Brown Chair-Department of AccountingLeonard N. Stern university of industrial, NYU"Let this ebook help in monetary understanding and transparency and better criteria of reporting, and responsibility to all stakeholders."-Patricia A. SmallTreasurer Emeritus, collage of CaliforniaPartner, KCM funding Advisors"This ebook is a elegant gem masking the research of monetary statements. it's thorough, skeptical and intensely sensible in its review."-Daniel J. FussVice ChairmanLoomis, Sayles & corporation, LP
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Extra info for Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
In the business world, it proves remarkably difficult to establish values with which all the interested parties concur. The difficulties a person may encounter in the quest for true value are numerous. Consider, for example, a piece of specialized machinery, acquired for $50,000. On the day the equipment is put into service, even before any controversies surrounding depreciation rates arise, value is already a matter of opinion. The company that made the purchase would presumably not have paid $50,000 if it perceived the machine to be worth a lesser amount.
These systematic biases are inherent in selling stocks. Within the universe of investors are many large, sophisticated financial institutions that utilize the best available techniques of analysis to select securities for their portfolios. Also among the buyers of stocks are individuals who, not being trained in financial statement analysis, are poorly equipped to evaluate annual and quarterly earnings reports. Both types of investors are important sources of financing for industry, and both benefit over the long term from the returns that accrue to capital in a market economy.
Would the corporation not have been better off if it had refrained from overstating its earnings in the first place, an act that probably cost it some measure of credibility among investors? If the analyst considers the matter from the standpoint of management, a possible solution to the riddle emerges. The day of reckoning, when the firm must “pay back” the reported earnings “borrowed” via underdepreciation, may be beyond the planning horizon of senior management. A chief executive officer who intends to retire in five years, and who will be compensated in the interim according to a formula based on reported earnings growth, may have no qualms about exaggerating current results at the expense of future years’ operations.