Customer Reviews

The Interpretation of Financial Statements

5 star:		(13)
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3 star:		(5)
2 star:		(3)
1 star:		(1)

 

 

Why they republished this edition when they might have republished the Second or Third Revised Edition (by Graham and Charles McGolrick, published in 1964 and 1975, respectively) beats me. The latter two editions are unquestionably better,as both are more current, and contain more useful tips regarding contextual interpretation.

It's true that the primary value of Graham's text is its framework, which provides concision in summarizing a potentially confusing topic. This framework persists through all four editions. Also, it's true that all four editions are pretty dated (there is no discussion of cash flow statement interpretation in any edition obviously, for example, although Graham alludes to the significance of cashflow interpretation somewhat disparagingly in the latter editions).

But all of Graham's guidelines for balance sheet analysis are still current in the latter two editions, as are his brief guidelines for bond analysis and earnings power. The first edition seems less useful in these respects.

One might assume that there is value in going back to the first edition of this small volume as one might go back to the first edition of Security Analysis. There are indeed nuggets in the first edition of Security Analysis which have been mysteriously removed from later editions. But that isn't true with The Interpretation of Financial Statements. If you can get your hands on a copy of the 1964 or 1975 edition of this book, you will likely find either more useful than this original edition.

Why they republished this edition when they might have republished the Second Revised Edition (by Graham and Charles McGolrick, originally published in 1964) beats me. The latter is unquestionably better,as it is more current, and contains more tips. Yet even the 1964 edition is pretty dated (there is no discussion of cash flow statement interpretation, for example, although Graham alludes to cashflow somewhat disparagingly in this later edition). One might argue that there is value in going back to the 1st edition of this small volume as one might go back to the 1st edition of Security Analysis. There are indeed nuggets in the 1st edition of Security Analysis which have been mysteriously removed from later editions. But that isn't true with The Interpretation of Financial Statements. If you can find a copy of the 1964 edition of this book, you will likely find it more useful than the original.

Although corporate 10Q's have become more complex due to a lot of the offbalance sheet investments they do, e.g. Enron. If a company is honest and has value this book will help you find it. So the way I approach my investing I have to assume all companies are honest unless proven otherwise.

So much time is taken to explain diversification by many other books, but none gives you the practical expertise to make an informed decision. This book does. It is a handy reference that sits on my desk. I use it to review annual reports and to interpret online SEC filings just to make sure the companies I have invested in are actually healthy.

This book is small, but what I have found over the years is that smaller books are better. They leave out the fluff and all you get are the meat and potatoes of what you need to know.

If you take your time to understand the information presented and use it, you'll be teaching your broker a thing or two at the end of the day.

Value investing is timeless and Ben Graham is the master of it, but that does not make his books necessarily worthy of reading. Understanding companies' financial statements is imperative for any serious investor but I do not recommend this book as your main source. This was written in 1937. The examples (mainly railroads and utilities) are out dated. Cash flow statements were not even used at that time. GAAP did not exist. If you are interested in better understanding of financial statements, I recommend the following three books instead:

Reading Financial Reports For Dummies by Lita Epstein

How to Read a Financial Report by John Tracy

Financial Statements by Thomas Ittelson

For the most part I found Graham's book to be very useful. It is a quick and informative read with some insights on how to make heads or tails of what you are looking at with an annual or quarterly report. Although there was some disappointment with the Income Statement explanation (which, honestly isn't terribly hard to understand), as well as his focus on railroad and utility companies (with some focus on bonds and preferred stocks, which I have no interest in), I found this to be very helpful.

On a whole, this book is excellent for the beginning investor. It is a little out of date, but the core information, as well as reading the words of Graham himself, is worth the read. Graham also applies everything he wrote about to a financial statement, showing exactly what to do, which is an invaluable piece of instruction. Definitely recommend, even if it is for the sample balance sheet analysis alone.

What this book is:

The 1936 edition of "The Interpretation of Financial Statements" by Benjamin Graham, the father of the modern academic discipline of financial analysis. In brief chapters with examples, Graham explains different entries you might find on a corporation's public balance sheet, how those assets and liabilities (debits and credits) add up, and what the meaning is with regard to that corporation's financial health. There are occasional glimpses of average figures by industry, but given that they were compiled in 1935, they are more interesting as a glimpse into the past - some things have changed, much more has remained the same.

What this book is not:

1. It's not a primer on double-entry accounting. If you really don't know anything about double-entry bookkeeping, you'll find the book rough going, as basic familiarity is assumed.

2. It's not an editorial. There's remarkably little opinion given about how to value companies based on their balance sheet entries. That task is performed in the author's mammoth magnum opus, Security Analysis (I prefer the 1940 edition). This book does function admirably as a tableside glossary to that work.

3. It won't tell you how to get rich by investing. Readers looking for get-rich-quick guides should look elsewhere.

4. GAAP- or SOAP-compliant. Both Generally Accepted Accounting Principles and Sarbanes-Oxley postdated the publication of this book by many years.

I enjoyed this book and found it a pleasant, intelligent and necessary introduction to Graham's Security Analysis. If you have interest in learning about the history of financial analysis, you will probably find this book of interest as well.

After skimming over the pages of Graham's Security Analysis, I decided to buy this smaller book, which was published few years later. I also noticed a recommendation by Joel Greenblatt in his book "You can be a Stock Market Genius".
People with finance/accounting background may not find this book useful. The book focuses more on items mentioned in the balance sheet and income statement. Cash flow statements weren't published during Graham's time. Later on the book gives important guidelines on some financial ratios. It also talks about calculating tangible book value of any company. Although it may not be useful to value technology/internet and asset-light companies, it would still help an investor calculate the real value of a company.
Good value for your money. This concise book is a must read for all amateur investors!

"In 1984, [Warren] Buffet returned to Columbia to give a speech commemorating the fiftieth anniversary of the publication of "Security Analysis". During that speech, he presented his own investment record as well as those of Ruane, Knapp, and Schloss [other successful investment managers who were students of Graham at Columbia]. In short, each of these men posted investment results that blew away the returns of the overall market. Buffett noted that each of the portfolios varied greatly in the number and type of stocks, but what did not vary was the managers' adherence to Graham's investment principles."

It is difficult to encapsulate Benjamin Graham's investing style in a few sentences or paragraphs. Readers are strongly urged to refer to his "The Intelligent Investor" to obtain a more thorough understanding of his investment principles.

In brief, the essence of Graham's value investing is that any investment should be worth substantially more than an investor has to pay for it. He believed in thorough analysis, which we would call fundamental analysis. He sought out companies with strong balance sheets, or those with little debt, above-average profit margins, and ample cash flow. (For more insight, see Introduction To Fundamental Analysis and Testing Balance Sheet Strength.)

He coined the phrase "margin of safety" to explain his common-sense formula that seeks out undervalued companies whose stock prices are temporarily down, but whose fundamentals, for the long run, are sound. The margin of safety on any investment is the difference between its purchase price and its intrinsic value. The larger this difference is (purchase price below intrinsic), the more attractive the investment - both from a safety and return perspective - becomes. The investment community commonly refers to these circumstances as low value multiple stocks (P/E, P/B, P/S).

Graham also believed that market valuations (stock prices) are often wrong. He used his famous "Mr. Market" parable to highlight a simple truth: stock prices will fluctuate substantially in value. His philosophy was that this feature of the market offers smart investors "an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."

This short book is a quick and straightforward review of balance sheet and income statement line items. The cash flow statement is not directly addressed. Each chapter is about two to three pages.

This book is a brief summary of how to interpret financial statements. While the book has some good points my main complaint is with its brevity. It also appears this book is best suited for those already familiar with the subject, perhaps as a short reminder of what to look for in financial statements.

I think this book would have been better if it had been expanded somewhat and possibly also if it had been included in either the book Security Analysis or in The Intelligent Investor. You should also note that this book is from 1937 and both accounting terminology and standards have changed somewhat since then, as have the types of businesses that exist.

If you are looking for a book that explains accounting really well at a beginner's level then I would instead recommend: Financial Statements by Thomas Ittelson. If you are looking for a book that reviews in more depth the interpretation of financial statements I would recommend: Analysis for Financial Management by Robert Higgins.