Financial Statement Analysis: A Practitioner's Guide, 3rd Edition (Hardcover)

by Martin Fridson (Author), Fernando Alvarez (Author) "Financial statement analysis is an essential skill in a variety of occupations including investment management, corporate finance, commercial lending, and the extension of credit..." (more)
Key Phrases: default risk models, bona fide profits, comparative ratio analysis, Big Time, Breathing Room, Deep Hock (more...)

Editorial Reviews

Review
In Financial Statement Analysis: A Practitioner?s Guide, Third Edition (New York: John Wiley & Sons, Inc., 2002), Martin Fridson and Fernando Alvarez detail a number of gimmicks that companies have employed, including:

• Booking deliveries of computer software to resellers as sales, despite undisclosed agreements permitting the return of unsold merchandise for refunds.
• Helping managers to achieve their annual sales targets by announcing a price increase, effective January 2, to induce customers to order before year-end, even though the hike puts the company out of line with the competition.
• Taking credit for volume-based rebates from suppliers before purchases of merchandise reach the level needed to qualify for the rebates.

Surprisingly, to many readers, the slipperiness depicted in Financial Statement Analysis is not limited to penny-stock companies or high-flying initial public offerings. A number of the book?s case studies involve widely respected Fortune 500 corporations. The authors quote an official of one such company who freely admits that when a division is in danger of missing its quarterly profit goal, management tries to make an acquisition in the waning days so that it can count the unit?s earnings for the entire period.

Fridson and Alvarez do not merely describe and deplore opaque financial reporting practices. They document a number of cases in which analysts successfully anticipated stock and bond price shocks, using financial ratios and publicly available information from outside the statements. The authors also provide practical advice on making financial projections. (Extra Credit, The Journal of Global High Yield Bond Research)

Financial Statement Analysis, by junk bond guru Martin Fridson, is my No. 1 pick for those at an intermediate level. Fridson does a great job of explaining the various forces at work in corporate financial statement preparation, and also has valuable insights into issues such as pro form a income statements and revenue recognition practices. - Street.com

Product Description
Praise for Financial Statement Analysis
A Practitioner’s Guide
Third Edition

"This is an illuminating and insightful tour of financial statements, how they can be used to inform, how they can be used to mislead, and how they can be used to analyze the financial health of a company."
–Professor Jay O. Light
Harvard Business School

"Financial Statement Analysis should be required reading for anyone who puts a dime to work in the securities markets or recommends that others do the same."
–Jack L. Rivkin
Executive Vice President (retired)
Citigroup Investments

"Fridson and Alvarez provide a valuable practical guide for understanding, interpreting, and critically assessing financial reports put out by firms. Their discussion of profits–‘quality of earnings’–is particularly insightful given the recent spate of reporting problems encountered by firms. I highly recommend their book to anyone interested in getting behind the numbers as a means of predicting future profits and stock prices."
–Paul Brown
Chair–Department of Accounting
Leonard N. Stern School of Business, NYU

"Let this book assist in financial awareness and transparency and higher standards of reporting, and accountability to all stakeholders."
–Patricia A. Small
Treasurer Emeritus, University of California
Partner, KCM Investment Advisors

"This book is a polished gem covering the analysis of financial statements. It is thorough, skeptical and extremely practical in its review."
–Daniel J. Fuss
Vice Chairman
Loomis, Sayles & Company, LP

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Product Details

• Hardcover: 396 pages
• Publisher: Wiley; 3 edition (March 15, 2002)
• Language: English
• ISBN-10: 0471409154
• ISBN-13: 978-0471409151
• Product Dimensions: 8.9 x 6.3 x 1.4 inches
• Shipping Weight: 1.4 pounds (View shipping rates and policies)
• Average Customer Review: 3.9 out of 5 stars See all reviews (14 customer reviews)
• Amazon.com Sales Rank: #295,575 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

66 of 67 people found the following review helpful:

5.0 out of 5 stars Focus is on developing insight, September 14, 2002

By	"ano202" (Somerville, MA United States) - See all my reviews

According to the author's introduction, the goal of "Financial Statement Analysis" is to "acquaint readers who have already acquired basic accounting skills with the complications that arise in applying textbook-derived knowledge to the real world of extending credit and investing in securities." It succeeds admirably in this purpose. By using case studies drawn from real world situations that illustrate how even a basic analysis can reveal problems before it's too late, the book is a cogent, topical, and valuable reference for any user of financial statements.

Part 1 sets the stage by positing the adversarial nature of financial accounting. Unlike the textbook approach, in which rational companies disclose audited statements in order to convey impartial data about their financial condition, "Financial Statement Analysis" begins with the proposition that the producers of financial statements have motives other than those suggested by traditional texts. Although you would find few people who would argue against this proposition today, it is still valuable to be reminded of the potential agency issues facing corporate officers and auditors.

Part 2 provides an intoduction to the financial statements, devoting a chapter to each. The main emphasis here is on helping the analyst develop judgement. For example, the balance sheet chapter provides insights into problems that arise from the difficulty of assigning a value to an asset, while the income statement chapter details the many pitfalls of pro-forma earnings. Throughout, the authors note critical issues to consider that go beyond the numbers.

Part 3 discusses the thorny problem of profits. Beginning with the simple formulation that "profit = revenue - costs," the authors discuss the myriad of complexities that arise in distinguishing real, economic profits from accounting profits. The first chapter discusses various tools used to manipulate the revenue recognition process; diverse examples include a software company, a lay-away program at a major retailer, and memberships at a health club. The next chapter discusses expense recognition using a similar framework. Perhaps the most interesting chapter in this section discusses the role of auditors. In light of the Enron fiasco, which post-dates this book's publication, the discussion is prescient and will no doubt need to be expanded in future editions!

Part 4 ties the previous sections together to illustrate how to use your new found scepticism to make forecasts. The first chapter provides a step-by-step illustration of how combine an existing set of statements with your assumptions about the future to produce your own forecasts. Each projected statement (income, cash flow, and balance sheet) is accompanied by a line-by-line description of relevant issues (economic, historic, etc...) to consider. The chapter also discusses how to construct a sensitivity analysis under varying assumptions. Unlike the previous chapters, this one provides a detailed explanation of how to actually go through the process, and was particularly appreciated by this reader. The other chapters in the section focus on the computation of the various ratios used in credit and equity analysis. Importantly, however, they move beyond the mechanics by providing the reader with insight into how to use, interpret, and recast the ratios under varying assumptions. As stated at the outset, the focus remains on helping the reader develop insight.

Finally, the book contains a useful glossary that provides definitions and examples for many economic, financial, and accounting terms and concepts.

One caveat, however. If your accounting skills are weak or rusty (like mine), you might might find the lack of more step-by-step examples and problem sets frustrating. In this case, you might consider supplementing the book with a more traditional textbook. (In the author's defense, they state in the introduction that accounting is assumed, so it's not really fair to fault them for this). Overall, however, the book is a very useful tool.

43 of 43 people found the following review helpful:

4.0 out of 5 stars excellent analyst-level text, May 2, 2004

By	rhyno (Houston, Texas United States) - See all my reviews

This review is from: Financial Statement Analysis: A Practitioner's Guide (Wiley Finance) (Paperback)

in all likelihood, average investors will not get much out of this book, as average investors don't pore over 10-ks, annual reports and conduct industry analysis prior to investing (which they should!). but for those above average investors who do (read: intelligent investors, per ben graham), this book is an excellent read.

2/3 of the book deals w/ alterting the investor to some of the areas where company mgmt can play games w/ the #s in order to goose the stock price. the examples were helpful, but the insights were not exactly earth shattering for experienced investors.

however, the last 1/3 of the book, on forecasts & security analysis, is worth the price of the book. in 100pgs, you get an MBA-level text on security / credit / financial statement analysis, complete w/ ratio definitions, caveats(!), and applicability. excellent stuff for the beginning or experienced analyst, and i will doubtless refer to the last 1/3 time and again.

13 of 13 people found the following review helpful:

5.0 out of 5 stars Interesting Examples and Highly Readable, August 4, 2002

By A Customer

In this environment, on the heels of the dot-com meltdown, and the implosions of Enron, Worldcom, and their ilk, a fresh look at financial statement analysis and what that can mean to an investor, is timely. The book is extremely well written and highly readable, unlike most texts I have seen on the subject. The detailed exercises are relegated to a separate workbook, making it an easier read for those who want to simply glean some new insights.

It is, in fact, a fast read, and the fresh, real-world case examples add new dimensions to the topic. There are, of course, detailed reviews of the basic financial statements, but also detailed discussions about these statements in light of M&A and other notable events in the life of a firm. One of the most interesting chapters included a detailed discussion of the EBITDA, which the PR machines have tried to paint as a true indicator of profitability.

This is a valuable resource to anyone who needs to analyze financial statements for professional reasons, but is straightforward enough to engage the reader who may only wish to better understand the companies in which he or she is considering investing.