Financial Statement Analysis

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.

Autorentext

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.

Inhalt

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...