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.
Acknowledgments
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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