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.
Preface to Fifth Edition xi Acknowledgments xv Part One Reading Between the Lines 1 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 12 Maximizing Growth Expectations 13 Downplaying Contingencies 20 The Importance of Being Skeptical 23 Conclusion 27 Part Two The Basic Financial Statements 31 Chapter 2 The Balance Sheet 33 The Value Problem 34 Comparability Problems in the Valuation of Financial Assets 36 Instantaneous Wipeout of Value 38 How Good Is Goodwill? 40 Losing Value the Old-Fashioned Way 44 True Equity Is Elusive 45 Book Value May Overstate Reality 46 Pros and Cons of a Market-Based Equity Figure 49 The Common Form Balance Sheet 51 Conclusion 53 Chapter 3 The Income Statement 55 Making the Numbers Talk 55 How Real Are the Numbers? 61 Conclusion 85 Chapter 4 The Statement of Cash Flows 87 The Cash Flow Statement and the Leveraged Buyout 89 Analytical Applications 95 In Defense of Slack 121 Conclusion 123 Part Three A Closer Look at Profits 125 Chapter 5 What Is Profit? 127 Bona Fide Profits versus Accounting Profits 127 Which Costs Count? 130 Conclusion 134 Chapter 6 Revenue Recognition 135 Making It Up at Gowex 135 Globo's Foreseen Fall from Grace 139 Channel-Stuffing in the Drug Business 143 A Second Take on Earnings 146 Making the Numbers at M/A-Com 149 Astray on Layaway 151 Recognizing Membership Fees 152 A Potpourri of Liberal Revenue Recognition Techniques 155 Fattening Earnings with Empty Calories 156 Tardy Disclosure at Halliburton 162 Managing Earnings with Rainy Day Reserves 165 Fudging the Numbers: A Systematic Problem 168 Conclusion 171 Chapter 7 Expense Recognition 173 Diamond Foods's Movable Expenses 173 Nortel's Deferred Profit Plan 176 Grasping for Earnings at General Motors 181 Time-Shifting at Freddie Mac 184 Conclusion 186 Chapter 8 The Applications and Limitations of EBITDA 187 EBIT, EBITDA, and Total Enterprise Value 188 The Role of EBITDA in Credit Analysis 193 Abusing EBITDA 196 A More Comprehensive Cash Flow Measure 198 Working Capital Adds Punch to Cash Flow Analysis 201 Conclusion 203 Chapter 9 The Reliability of Disclosure and Audits 205 Where Was the Cash? 206 Sloppiness Can Be a Red Flag 210 How Manipulation Evades Detection 214 Systematic Problems in Auditing 215 Conclusion 220 Chapter 10 Mergers-and-Acquisitions Accounting 221 Goodwill Goes Bad 223 Double Trouble 224 Conclusion 227 Chapter 11 Is Fraud Detectable? 229 Telltale Signs of Manipulation 230 Fraudsters Know Few Limits 233 Enron: A Media Sensation 233 HealthSouth's Excruciating Ordeal 242 Milk and Other Liquid Assets 249 Trouble Was Brewing at Luckin 252 Conclusion 254 Part Four Forecasts and Security Analysis 255 Chapter 12 Forecasting Financial Statements 257 A Typical One-Year Projection 257 Sensitivity Analysis with Projected Financial Statements 270 Projecting Financial Flexibility 276 Pro Forma Financial Statements 279 Multiyear Projections 285 Conclusion 299 Chapter 13 Credit Analysis 301 Balance Sheet Ratios 302 Income Statement Ratios 311 Statement of Cash Flows Ratios 316 Combination Ratios 318 Relating Ratios to Credit Risk 326 Conclusion 342 Chapter 14 Equity Analysis 343 The Dividend Discount Model 344 The Price-Earnings Ratio 350 The Du Pont Formula 360 Valuation through Restructuring Potential 364 Advanced Equity Analysis 370 Conclusion 373 Notes 375 Glossary 387 Further Reading 405 About the Authors 407 Index 409
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