ESSENTIALS of Financial Analysis George T. Friedlob Lydia L.F. Schleifer The financial analysis of companies is usually undertaken so that invest

ESSENTIALS of Financial Analysis

George T. Friedlob      Lydia L.F. Schleifer

The financial analysis of companies is usually undertaken so that investors, creditors, and other stakeholders can make decisions about those companies.The focus of this book is on the financial analysis of companies that are publicly traded and therefore make public the data and information needed by stakeholders,who can then use the analytical procedures included in this book.

The primary objectives in this book are to

• Provide an overview of financial statements and where and how to obtain them.

• Explain how to use the information provided in annual reports and Securities and Exchange Commission (SEC) filings, to examine a company’s profitability, liquidity, and solvency.

• Examine various techniques for evaluating the market value of companies based on their financial reports and stock prices.

• Discuss issues related to the quality of earnings and financial reporting.

• Describe several ways of examining the cash flows of companies.

• Describe new developments in areas like pro forma reporting, economic value added (EVA), and discounted cash flow methods.


Chapter 1 starts by looking briefly at how accounting for resources began.

Then, an example of a set of financial statements (for Coca-Cola Company) is included and their content explained. Following that is a comparison of cash-basis and accrual-basis accounting.

Chapter 2 looks at profitability from many angles. Profits are reported on the income statement, so we start with a look at the categories of earnings on the income statement.The chapter discusses operating income and comprehensive income and where to find that information. Because revenue recognition is so much in the spotlight lately, the basics of that principle are discussed. Four of the main analytical techniques used by financial analysts are included: return on assets (ROA), return on equity (ROE), earnings per share (EPS), and the price/earnings (P/E) ratio.

Chapter 3 examines the concepts of liquidity and solvency and how to evaluate those attributes for a company.The primary focus is on the balance sheet. However, also included are some cash flow adequacy ratios, since lack of cash flow can force companies to declare bankruptcy.

The chapter discusses how leverage can affect a company.Also included is a discussion of the auditor’s decision process when evaluating going concern status. Finally,we include a demonstration of the use of Altman’s Z score.

Chapter 4 examines the activity, effectiveness, and productivity measures that can be used to evaluate companies.The chapter discusses several turnover ratios, like accounts receivable and inventory turnover.

It also discusses a method of analyzing capacity usage and how to calculate operating leverage and examine its impact on profitability.

Chapter 5 discusses the issue of quality of earnings and how certain aspects of financial  eporting enhance or detract from that quality.

Because quality is related to how predictive of cash flows the information is, the chapter also includes several cash flow ratios and what information they provide. Common-size cash flow statements take the cash flow analysis one step further.Common-size income statements and balance sheets are also included.

Chapters 6 and 7 discuss relatively recent developments in financial analysis. Chapter 6 includes pro forma reporting and EVA.

Chapter 7 discusses e-business and includes several methods for analyzing the value of Internet businesses.

As more and more people make the decision to control their own investment decisions, the need for explanations of financial analysis tools becomes greater.The intent of this book is to provide helpful explanatory information to financial statement users and company stakeholders of all sorts. If you are one of these stakeholders, we hope that this book will help you to make good decisions regarding the businesses in which you have or want to have a stake.


The authors would like to acknowledge the contribution of Paul Schleifer to this project.They would also like to thank Judy Howarth for her patience throughout the process of writing this book.

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