How to learn about financial statement analysis?

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Lauretta
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How to learn about financial statement analysis?

Post by Lauretta » Mon Oct 16, 2017 4:35 pm

I am becoming interested in financial statements - it's actually quite fun when you begin to see how things fit together within a statement or across different statements. I remember when I was at university people thought that accountancy is really boring, but it doesn't seem to be that way to me now! So I was wondering how you learnt about financial statement analysis and whether you have some books/courses to suggest: the more fun they are, the better!
When everyone is thinking the same, no one is thinking at all

123
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Re: How to learn about financial statement analysis?

Post by 123 » Mon Oct 16, 2017 4:54 pm

My school major was business so I had plenty of accounting/finance classes. The best way to learn is to take accounting courses at a junior college, college, or university. You might look to see what is available at one of the free online "universities" liked coursera.org If you self-motivated, and you sound like you are, maybe just getting some college accounting books (even from a local library) will meet your needs. From my recollection "Intermediate Accounting" type titles might be a good place to start, of course there are may books addressing financial statement analysis, check your library.

If your interested, accounting is fun. Otherwise, not so much.
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carorun
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Re: How to learn about financial statement analysis?

Post by carorun » Mon Oct 16, 2017 5:33 pm

I learned it in business school. Was really interested in personal finance previously but as an indexer I never need to understand a balance sheet, for example.

Are you looking to do fundamental analysis like Ben Graham? If so, I hear good things about the book Securities Analysis but that might be a high level at which to start.

I highly recommend Training the Street to almost everyone because it improved my excel skills immensely and gave me an easy framework to develop financial models. Some schools and employers offer the course, but I think they have an online version through udemy that could give you the basics.

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Lauretta
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Re: How to learn about financial statement analysis?

Post by Lauretta » Mon Oct 16, 2017 5:39 pm

123 wrote:
Mon Oct 16, 2017 4:54 pm


If your interested, accounting is fun. Otherwise, not so much.
thanks :-) yes I remember, at least in the UK, everyone thought it was boring, but I actually find it very interesting now that I am finding out about it! I really like value investing-it resonates with me- and to get those valuation ratios and then add quality ratios to them (as measured e.g. by ROE or by gross profitability) some knowledge of statements is essential.
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Lauretta
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Re: How to learn about financial statement analysis?

Post by Lauretta » Mon Oct 16, 2017 5:48 pm

carorun wrote:
Mon Oct 16, 2017 5:33 pm
I learned it in business school. Was really interested in personal finance previously but as an indexer I never need to understand a balance sheet, for example.

Are you looking to do fundamental analysis like Ben Graham? If so, I hear good things about the book Securities Analysis but that might be a high level at which to start.

I highly recommend Training the Street to almost everyone because it improved my excel skills immensely and gave me an easy framework to develop financial models. Some schools and employers offer the course, but I think they have an online version through udemy that could give you the basics.
I have some of my assets in small cap value EU firms. For this, I am using Meb Faber's suggestion in 'Invest with the house' and purchasing the same individual stocks as a small cap value fund using mainly quantitative methods which has a very good track record (and is closed to subscriptions) It has done very well and it publishes its holdings every month. It is fun because one one my stocks is up 115% YTD and out of 40 stocks only 2 are down. Now I want to understand more how the fund manager selects those stocks. He uses price/cash flow and then ROE and operating margin; so I want to understand these quantitities and also why e.g. price/cash flow should be preferable to EV/EBITDA etc.
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Taylor Larimore
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Re: How to learn about financial statement analysis?

Post by Taylor Larimore » Mon Oct 16, 2017 6:33 pm

Lauretta wrote:
Mon Oct 16, 2017 4:35 pm
I am becoming interested in financial statements - it's actually quite fun when you begin to see how things fit together within a statement or across different statements. I remember when I was at university people thought that accountancy is really boring, but it doesn't seem to be that way to me now! So I was wondering how you learnt about financial statement analysis and whether you have some books/courses to suggest: the more fun they are, the better!
Lauretta:

Most of my life was spent analyzing financial statements while working in the IRS and SBA. In addition I hold the Certified Commercial Lender Certification from the American Institute of Banking and I taught Term Lending in the largest bank in Florida.

What did all this learning and experience teach me? It taught me that analyzing large business financial statements is no help in forecasting stock prices in hopes of beating the market.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

runner540
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Re: How to learn about financial statement analysis?

Post by runner540 » Mon Oct 16, 2017 6:35 pm

Find some old CFA books and study them.

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Re: How to learn about financial statement analysis?

Post by alex_686 » Mon Oct 16, 2017 6:40 pm

runner540 wrote:
Mon Oct 16, 2017 6:35 pm
Find some old CFA books and study them.
I would second this. It is a little bit on the overkill side of things. However the CFA curriculum covers many areas and does an excellent job of integrating different study topics. For example, how to adjust financial statements to get a better economic picture of the company. You have been asking a wide range of basic investment theory topic and it might be nice to get them all lined up in a row. Even books 5 years out of date should have what you need.

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Re: How to learn about financial statement analysis?

Post by aegis965 » Mon Oct 16, 2017 10:04 pm

I would recommend Damodaran's valuation course on Youtube, and Penman's book Accounting for Value.
"Value investing is at its core the marriage of a contrarian streak and a calculator." —Seth Klarman

TheNightsToCome
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Re: How to learn about financial statement analysis?

Post by TheNightsToCome » Mon Oct 16, 2017 10:15 pm

alex_686 wrote:
Mon Oct 16, 2017 6:40 pm
runner540 wrote:
Mon Oct 16, 2017 6:35 pm
Find some old CFA books and study them.
I would second this. It is a little bit on the overkill side of things. However the CFA curriculum covers many areas and does an excellent job of integrating different study topics. For example, how to adjust financial statements to get a better economic picture of the company. You have been asking a wide range of basic investment theory topic and it might be nice to get them all lined up in a row. Even books 5 years out of date should have what you need.
Agree. You don't need to read the basic texts recommended for the CFA curriculum. I used the Schweser review books: https://schweser.com/cfa. I had no economics, accounting, or finance training but passed all three CFA exams on the first attempt relying on these review books.

If interested, you can go from there to the basic texts.

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Re: How to learn about financial statement analysis?

Post by chewfruit » Tue Oct 17, 2017 1:00 am

This is my first post.

I found this book to be very helpful: Managing by the Numbers by Kremer, Rizzuto, and Case.

It explains the relationships between the Balance Sheet, the Income statement, the Cash Flow statement, and the financial ratios, and explains how to run forecasts.

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Re: How to learn about financial statement analysis?

Post by Valuethinker » Tue Oct 17, 2017 3:39 am

Lauretta wrote:
Mon Oct 16, 2017 4:35 pm
I am becoming interested in financial statements - it's actually quite fun when you begin to see how things fit together within a statement or across different statements. I remember when I was at university people thought that accountancy is really boring, but it doesn't seem to be that way to me now! So I was wondering how you learnt about financial statement analysis and whether you have some books/courses to suggest: the more fun they are, the better!
Coursera

Pretty sure the Wharton School (U of Pennsylvania) does a course via Coursera. If not them, then Michigan, Duke, Northwestern would all be good.

One of the top business schools in the world and probably the top undergraduate business school (in the English speaking world: in France you have HEC, in Switzerland St. Gallen, which are at least as good but do a lot of their teaching in the local language; can't speak to other countries but Italy it would be Bocconi (sp?) in Milan).

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Re: How to learn about financial statement analysis?

Post by SQRT » Tue Oct 17, 2017 4:23 am

Taylor Larimore wrote:
Mon Oct 16, 2017 6:33 pm
Lauretta wrote:
Mon Oct 16, 2017 4:35 pm
I am becoming interested in financial statements - it's actually quite fun when you begin to see how things fit together within a statement or across different statements. I remember when I was at university people thought that accountancy is really boring, but it doesn't seem to be that way to me now! So I was wondering how you learnt about financial statement analysis and whether you have some books/courses to suggest: the more fun they are, the better!
Lauretta:

Most of my life was spent analyzing financial statements while working in the IRS and SBA. In addition I hold the Certified Commercial Lender Certification from the American Institute of Banking and I taught Term Lending in the largest bank in Florida.

What did all this learning and experience teach me? It taught me that analyzing large business financial statements is no help in forecasting stock prices in hopes of beating the market.

Best wishes.
Taylor
I would agree with you, I am a CPA, MBA, and CFA holder. While I think the ability to analyse financial statements is certainly useful in one’s career, it is not very useful in investing in listed companies. There are many very qualified and experienced analysts who spend their whole working lives doing this and communicating the results of their work to the market. If you think you can find something that these guys missed spending a few hours on a set of Financial Statements carry on. Seems very doubtful to me.

Still nice to hear someone thinks it’s fun.

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Lauretta
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Re: How to learn about financial statement analysis?

Post by Lauretta » Tue Oct 17, 2017 4:24 pm

SQRT wrote:
Tue Oct 17, 2017 4:23 am
Taylor Larimore wrote:
Mon Oct 16, 2017 6:33 pm
Lauretta wrote:
Mon Oct 16, 2017 4:35 pm
I am becoming interested in financial statements - it's actually quite fun when you begin to see how things fit together within a statement or across different statements. I remember when I was at university people thought that accountancy is really boring, but it doesn't seem to be that way to me now! So I was wondering how you learnt about financial statement analysis and whether you have some books/courses to suggest: the more fun they are, the better!
Lauretta:

Most of my life was spent analyzing financial statements while working in the IRS and SBA. In addition I hold the Certified Commercial Lender Certification from the American Institute of Banking and I taught Term Lending in the largest bank in Florida.

What did all this learning and experience teach me? It taught me that analyzing large business financial statements is no help in forecasting stock prices in hopes of beating the market.

Best wishes.
Taylor
I would agree with you, I am a CPA, MBA, and CFA holder. While I think the ability to analyse financial statements is certainly useful in one’s career, it is not very useful in investing in listed companies. There are many very qualified and experienced analysts who spend their whole working lives doing this and communicating the results of their work to the market. If you think you can find something that these guys missed spending a few hours on a set of Financial Statements carry on. Seems very doubtful to me.

Still nice to hear someone thinks it’s fun.
:happy For me it's fun to see how it all fits together. It also feels good to be able to see where all those ratios I heard about are inter-related. So that's why I want to learn a bit more.
I am not planning to pick stocks myself; however as I said earler, since I can't invest in a small cap value fund I like because it's closed to new subscriptions, I've ended up, with a small fraction of my assets, purchasing the individual stocks because the manager publishes the list (I guess so people buy them and the price increases ;-) ) So I like checking the ratios of those stocks I own.
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sksbog
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Re: How to learn about financial statement analysis?

Post by sksbog » Tue Oct 17, 2017 7:04 pm

I learned from this book _- Seeing the big picture by Kevin cope

Author takes a case study of a small business being set up by an entrepreneur and keeps expanding it until it becomes an enterprise.
At each stage, Kevin details about cash flow and balance sheet and how it looks like. I enjoyed reading it.

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Re: How to learn about financial statement analysis?

Post by JBTX » Tue Oct 17, 2017 8:17 pm

My education and career is in accounting and finance, but I never use financial statement analysis in investing. Not only do you have to understand basic accounting and finance, but you have to understand the peculiarities of the company and the industry. Just looking at a company financial statement, without knowing a lot about what is going into the numbers or the methodology used, doesn't tell you a lot.

If you already have some basic knowledge of finance and accounting, one way to study would be pick some companies and read through their annual reports, including the notes, and then also look for analysts comments that take a critical look, or listen in to the analysts earnings calls.

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Re: How to learn about financial statement analysis?

Post by TheNightsToCome » Tue Oct 17, 2017 9:16 pm

JBTX wrote:
Tue Oct 17, 2017 8:17 pm
My education and career is in accounting and finance, but I never use financial statement analysis in investing. Not only do you have to understand basic accounting and finance, but you have to understand the peculiarities of the company and the industry. Just looking at a company financial statement, without knowing a lot about what is going into the numbers or the methodology used, doesn't tell you a lot.

If you already have some basic knowledge of finance and accounting, one way to study would be pick some companies and read through their annual reports, including the notes, and then also look for analysts comments that take a critical look, or listen in to the analysts earnings calls.
Agree. Computer programs (run by quant shops) can run the numbers (profitability ratios, financial health ratios, etc.) more efficiently than any individual investor. If you want to invest in individual stocks successfully you'll have to bring something more to the table, but you can't even begin if you don't understand financial statement analysis.

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Re: How to learn about financial statement analysis?

Post by JBTX » Tue Oct 17, 2017 9:26 pm

TheNightsToCome wrote:
Tue Oct 17, 2017 9:16 pm
JBTX wrote:
Tue Oct 17, 2017 8:17 pm
My education and career is in accounting and finance, but I never use financial statement analysis in investing. Not only do you have to understand basic accounting and finance, but you have to understand the peculiarities of the company and the industry. Just looking at a company financial statement, without knowing a lot about what is going into the numbers or the methodology used, doesn't tell you a lot.

If you already have some basic knowledge of finance and accounting, one way to study would be pick some companies and read through their annual reports, including the notes, and then also look for analysts comments that take a critical look, or listen in to the analysts earnings calls.
Agree. Computer programs (run by quant shops) can run the numbers (profitability ratios, financial health ratios, etc.) more efficiently than any individual investor. If you want to invest in individual stocks successfully you'll have to bring something more to the table, but you can't even begin if you don't understand financial statement analysis.
Even ratios can be fairly meaningless without knowing some specifics.

Decades ago i went to a local college as a representive of mega corp financial department, and the class was studying megacorps financial statements. It was a little uncomfortable because even though I worked in finance group I wasn't heavily involved in the total company rollup. However, I recall class students making favorable comments about the low receivables, but I recalled that for some reason megacorp chose to factor their receivables to make them look low (which by my recollection was a really stupid thing to do - factoring is for companies that can't get financing through traditional means).

Also worked for a mid level firm that entered into bank"operating leases" on all of their assets to avoid capitalizing them and keep them off the balance sheet (I think the lease accounting standards have changed since then).

So just running standard ratios and trying to evaluate them in a vacuum is a fool's errand. Now looking at such ratios from quarter to quarter or year to year for the same company could be informative, or at least prompt questions.

i won't even get into my experiences of working with companies that "stuffed the channel" to inflate revenues and another that capitalized just about all expenses relating to the sale, including all remote office costs, of contracts as an asset.

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Re: How to learn about financial statement analysis?

Post by Lauretta » Sat Oct 28, 2017 4:19 am

JBTX wrote:
Tue Oct 17, 2017 9:26 pm
TheNightsToCome wrote:
Tue Oct 17, 2017 9:16 pm
JBTX wrote:
Tue Oct 17, 2017 8:17 pm
My education and career is in accounting and finance, but I never use financial statement analysis in investing. Not only do you have to understand basic accounting and finance, but you have to understand the peculiarities of the company and the industry. Just looking at a company financial statement, without knowing a lot about what is going into the numbers or the methodology used, doesn't tell you a lot.

If you already have some basic knowledge of finance and accounting, one way to study would be pick some companies and read through their annual reports, including the notes, and then also look for analysts comments that take a critical look, or listen in to the analysts earnings calls.
Agree. Computer programs (run by quant shops) can run the numbers (profitability ratios, financial health ratios, etc.) more efficiently than any individual investor. If you want to invest in individual stocks successfully you'll have to bring something more to the table, but you can't even begin if you don't understand financial statement analysis.
Even ratios can be fairly meaningless without knowing some specifics.

Decades ago i went to a local college as a representive of mega corp financial department, and the class was studying megacorps financial statements. It was a little uncomfortable because even though I worked in finance group I wasn't heavily involved in the total company rollup. However, I recall class students making favorable comments about the low receivables, but I recalled that for some reason megacorp chose to factor their receivables to make them look low (which by my recollection was a really stupid thing to do - factoring is for companies that can't get financing through traditional means).

Also worked for a mid level firm that entered into bank"operating leases" on all of their assets to avoid capitalizing them and keep them off the balance sheet (I think the lease accounting standards have changed since then).

So just running standard ratios and trying to evaluate them in a vacuum is a fool's errand. Now looking at such ratios from quarter to quarter or year to year for the same company could be informative, or at least prompt questions.

i won't even get into my experiences of working with companies that "stuffed the channel" to inflate revenues and another that capitalized just about all expenses relating to the sale, including all remote office costs, of contracts as an asset.
ah ok. I am still a bit puzzled about this because on the one hand people who here who know a lot about financial statements say they don't seem to help in investing; on the other the quants by just picking stocks with low PE ratios (or price to cash flow) - and with ROE+operating margins above some threshold values, seem to beat the market (as in value investing).
When everyone is thinking the same, no one is thinking at all

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in_reality
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Re: How to learn about financial statement analysis?

Post by in_reality » Sat Oct 28, 2017 6:46 am

Lauretta wrote:
Sat Oct 28, 2017 4:19 am
JBTX wrote:
Tue Oct 17, 2017 9:26 pm
TheNightsToCome wrote:
Tue Oct 17, 2017 9:16 pm
JBTX wrote:
Tue Oct 17, 2017 8:17 pm
My education and career is in accounting and finance, but I never use financial statement analysis in investing. Not only do you have to understand basic accounting and finance, but you have to understand the peculiarities of the company and the industry. Just looking at a company financial statement, without knowing a lot about what is going into the numbers or the methodology used, doesn't tell you a lot.

If you already have some basic knowledge of finance and accounting, one way to study would be pick some companies and read through their annual reports, including the notes, and then also look for analysts comments that take a critical look, or listen in to the analysts earnings calls.
Agree. Computer programs (run by quant shops) can run the numbers (profitability ratios, financial health ratios, etc.) more efficiently than any individual investor. If you want to invest in individual stocks successfully you'll have to bring something more to the table, but you can't even begin if you don't understand financial statement analysis.
Even ratios can be fairly meaningless without knowing some specifics.

Decades ago i went to a local college as a representive of mega corp financial department, and the class was studying megacorps financial statements. It was a little uncomfortable because even though I worked in finance group I wasn't heavily involved in the total company rollup. However, I recall class students making favorable comments about the low receivables, but I recalled that for some reason megacorp chose to factor their receivables to make them look low (which by my recollection was a really stupid thing to do - factoring is for companies that can't get financing through traditional means).

Also worked for a mid level firm that entered into bank"operating leases" on all of their assets to avoid capitalizing them and keep them off the balance sheet (I think the lease accounting standards have changed since then).

So just running standard ratios and trying to evaluate them in a vacuum is a fool's errand. Now looking at such ratios from quarter to quarter or year to year for the same company could be informative, or at least prompt questions.

i won't even get into my experiences of working with companies that "stuffed the channel" to inflate revenues and another that capitalized just about all expenses relating to the sale, including all remote office costs, of contracts as an asset.
ah ok. I am still a bit puzzled about this because on the one hand people who here who know a lot about financial statements say they don't seem to help in investing; on the other the quants by just picking stocks with low PE ratios (or price to cash flow) - and with ROE+operating margins above some threshold values, seem to beat the market (as in value investing).
OK, so would you plan to analyze the market? That is what they are doing, isn't it?

And if you did analyze the market, would your results for which funds are value funds be all that different?

Granted, there are differences - RAFI's methodology uses a five year history which means for instance it got more heavily into financials after the 2008 financial crisis and into energy after it dropped. Other indexes delve into deep value more. Knowing the research which shows contributed capital doesn't predict value returns but retained earnings does helped me be comfortable choosing an index (that doesn't rely on price/book or book/market as much since contributed capital boosts book value but isn't predictive of returns). Anyway, I can see now why Fama/French started using a profitability factor.

Momentum is another area where methodology is important. Perhaps any factor methodology should be known and considered before using those funds.

As a practical matter, I think it's best to choose an index by methodology than try to do analysis by oneself.

For me, I've read differing views on momentum and sort of am thinking of throwing in the towel. I'm not sure I have the desire to try and find the right one. The results seem to show that exposure to momentum didn't help mutual funds, and a lack of exposure didn't hurt. But of course the right kind of exposure is probably profitable. Perhaps AQR has the secret sauce.

I'm going to use my energy to try and boost my income. This is what my spouse who was formerly a successful equities analyst encourages me to do. There is no guarantee that the numbers you are looking at in the first place aren't smoothed in some way (Twitter has how many new users). That makes it terribly hard to make a bet on a few companies (which is so risky anyways) and again it's too much work to analyze the market.

alex_686
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Re: How to learn about financial statement analysis?

Post by alex_686 » Mon Oct 30, 2017 10:41 am

Lauretta wrote:
Sat Oct 28, 2017 4:19 am
ah ok. I am still a bit puzzled about this because on the one hand people who here who know a lot about financial statements say they don't seem to help in investing; on the other the quants by just picking stocks with low PE ratios (or price to cash flow) - and with ROE+operating margins above some threshold values, seem to beat the market (as in value investing).
There are 3 ways at looking at this.

First, nobody uses the financial statements as is. There is a difference between accounting and economic truth. Adjustments have to be made. A example is that adjustments need to be made between American and European companies. They use different accounting standards. If you want to compare statements between the 2 adjustments must be made. Most of the big data providers will provided both adjusted and raw numbers. Quants will often customize their own adjustments.

Second, if you tear apart financial statements you are considered a fundamentalist. Warren Buffet is one. There are problems with this approach It is time and skill intensive. Payoff is not assured. You can have the right analysis and still fail - after all the company may be unlucky.

Lastly, if fundamentalist are like doctors, which study a single patient at a time, then quants are epidemiologist, which study populations. It does not matter if you nail down the exact fundamentals of a individual company. What matters is if they can nail down the trends. They just need to be generally right.

MP173
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Re: How to learn about financial statement analysis?

Post by MP173 » Mon Oct 30, 2017 4:58 pm

I have always been interested in company's financials and the use of ratios, etc.

At this point in time, I use Morningstar to crunch out the data and ratios. There are a few important ratios which I pay attention to.

The book "Five Rules for Successful Investing" (Morningstar Publication) by Pat Dorsey is a very good look at certain financial info and how it impacts a company. I no longer buy individual stocks but own quite a few. If you are going to own stocks, it is my opinion that you do not buy stock in a company, you must have the attitude that you are buying the company. Therefore it is good to know as much about the company, their markets, their competitors, etc. as possible. It takes time.

A method I used 15 years ago when I was accumulating individual stocks was to use the Morningstar rankings and their "fair value". I had a list of about 10-15 stock and would use a portion of my monthly free cash flow to purchase the companies which were at a higher discount to the Morningstar fair value.

It seemed to work for me.

Ed

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patrick013
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Re: How to learn about financial statement analysis?

Post by patrick013 » Mon Oct 30, 2017 5:51 pm

Well I really don't think it's the financial statements fault...
US GAAP uses lower of cost or market and should continue
to do so and the few instances where it deviates it does so on
a consistent basis across all companies so every basis for
everybody has the same thing. If it was up to me I would use
lower of cost or market hard style as it doesn't overstate income,
it actually provides the least favorable effect on current fully
diluted earnings per share - no marketing bias.

But if I learned 3 things :
EPS estimates for 3 to 5 years (see Barron's)
Current assets to current liabilities ratio
Debt to Equity ratio
PE

You should be able to see a company with a bright future with a medium low
valuation.

But an accounting statement at cost in no way reflects a company's earning
power and related stock price, given a reasonable balance sheet. :)
age in bonds, buy-and-hold, 10 year business cycle

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Lauretta
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Re: How to learn about financial statement analysis?

Post by Lauretta » Tue Oct 31, 2017 2:46 am

alex_686 wrote:
Mon Oct 30, 2017 10:41 am
Lauretta wrote:
Sat Oct 28, 2017 4:19 am
ah ok. I am still a bit puzzled about this because on the one hand people who here who know a lot about financial statements say they don't seem to help in investing; on the other the quants by just picking stocks with low PE ratios (or price to cash flow) - and with ROE+operating margins above some threshold values, seem to beat the market (as in value investing).
There are 3 ways at looking at this.

First, nobody uses the financial statements as is. There is a difference between accounting and economic truth. Adjustments have to be made. A example is that adjustments need to be made between American and European companies. They use different accounting standards. If you want to compare statements between the 2 adjustments must be made. Most of the big data providers will provided both adjusted and raw numbers. Quants will often customize their own adjustments.

Second, if you tear apart financial statements you are considered a fundamentalist. Warren Buffet is one. There are problems with this approach It is time and skill intensive. Payoff is not assured. You can have the right analysis and still fail - after all the company may be unlucky.

Lastly, if fundamentalist are like doctors, which study a single patient at a time, then quants are epidemiologist, which study populations. It does not matter if you nail down the exact fundamentals of a individual company. What matters is if they can nail down the trends. They just need to be generally right.
I like the metaphors in this explanation. My aim is to understand a bit more what you discuss in your third point. For example, is it better to use market cap (as in the PE ratio) or TEV (as in the TEV/EBITDA ratio) when valuing companies the way quants do? And similarly, is it better to use sales, earnings, free cash flow or EBITDA in the denominator of those ratios? What are the advantages/disadvantages of each?. That's as far as I would like to go. I don't have at all the ambition of delving in the details of each individual company but I'd like a better undestanding of these simple ratios that appear in many academic papers.
When everyone is thinking the same, no one is thinking at all

lhl12
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Re: How to learn about financial statement analysis?

Post by lhl12 » Tue Oct 31, 2017 5:02 am

chewfruit wrote:
Tue Oct 17, 2017 1:00 am
This is my first post.

I found this book to be very helpful: Managing by the Numbers by Kremer, Rizzuto, and Case.

It explains the relationships between the Balance Sheet, the Income statement, the Cash Flow statement, and the financial ratios, and explains how to run forecasts.
Welcome to the forum!

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friar1610
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Re: How to learn about financial statement analysis?

Post by friar1610 » Tue Oct 31, 2017 9:50 am

I don't know whether this book is still in print or not. "How to Read a Financial Report for Managers, Entrepreneurs, Lenders, Lawyers and Investors" by John A. Tracy. Published by John Wiley and Sons. My copy is the 3rd Edition. I bought it >20 years ago as I was beginning to look toward retirement from the Navy. At a seminar I took about transitioning to the private sector this book was highly recommended for those of us who may have otherwise been competent managers but were weak on the financial side of the business world. I haven't looked at it in years, but I recall it was quite helpful at the time. The hype on the cover also says "Wringing cash flow and other vital signs out of the numbers..."
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Pajamas
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Re: How to learn about financial statement analysis?

Post by Pajamas » Tue Oct 31, 2017 9:54 am

Lauretta wrote:
Mon Oct 16, 2017 4:35 pm
I am becoming interested in financial statements - it's actually quite fun when you begin to see how things fit together within a statement or across different statements. I remember when I was at university people thought that accountancy is really boring, but it doesn't seem to be that way to me now! So I was wondering how you learnt about financial statement analysis and whether you have some books/courses to suggest: the more fun they are, the better!
Take a formal class in basic accounting at a university, perhaps in the evening. It helps to have someone teaching you in person. Imagine trying to learn to read on your own from watching videos or trying to learn math by reading a book and learning accounting on your own would be equally difficult.


Oreamnos
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Re: How to learn about financial statement analysis?

Post by Oreamnos » Tue Oct 31, 2017 3:34 pm

Lauretta wrote:
Mon Oct 16, 2017 4:35 pm
I am becoming interested in financial statements - it's actually quite fun when you begin to see how things fit together within a statement or across different statements. I remember when I was at university people thought that accountancy is really boring, but it doesn't seem to be that way to me now! So I was wondering how you learnt about financial statement analysis and whether you have some books/courses to suggest: the more fun they are, the better!
I like the book "Financial Intelligence" by Karen Berman and Joe Knight. Nice, readable perspective on things, and one that explicitly acknowledges that the preparation of financial statements isn't really black and white. LOTS and lots of subjective calls made in how things are reported.

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Re: How to learn about financial statement analysis?

Post by alex_686 » Wed Nov 01, 2017 11:51 am

Pajamas wrote:
Tue Oct 31, 2017 9:54 am
Take a formal class in basic accounting at a university, perhaps in the evening. It helps to have someone teaching you in person. Imagine trying to learn to read on your own from watching videos or trying to learn math by reading a book and learning accounting on your own would be equally difficult.
I would slightly disagree. Creating financial statements is intermediate / advance work for a accountant, reading financial statements is intro / intermediate work for finance.

To the OP, all of the things you mentioned have a place in your tool box. TEV, EPS, book value, etc. Knowing how to use them is a different matter. 2 examples.

The predictive value of book value has been declining. Book value used to refer mostly to tangible things like factories and inventory. Now it tends to refer to intangibles. A exception is banks, where every loan is a tangible asset.

What is the value of a stock? It is the discounted value of Free Cash Flow to Equity. So the P/E ratio value has current earnings, expected growth, and risk packed into it. What is EBITA? It is the profit that the enterprise earns before the CFO gets hold of it. The CFO can easily manipulate the EPS value. Simplifying a bit, while TEV remains constant the CFO get to decided what portion of the capital structure is "owned" by bond holders and what portion by stock holders. If the CFO wants EPS to go up they just issue debt and do a stock buy back. EBITA and TEV remains the same but a larger slug of earnings go towards the stockholders. Of course, as debt goes up the riskiness of the company go up. Too much debt means too much risk which means the price collapses so P/E ratio collapses.

By understanding the financials one can get a sense of the risk and return one is taking in the stock market. Rarely are these values stand alone. Which is why I gave a little nudge on finding some old CFA books. The CFA does a excellent job in tying all of these thing together.

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Pajamas
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Re: How to learn about financial statement analysis?

Post by Pajamas » Wed Nov 01, 2017 3:21 pm

alex_686 wrote:
Wed Nov 01, 2017 11:51 am

I would slightly disagree. Creating financial statements is intermediate / advance work for a accountant, reading financial statements is intro / intermediate work for finance.
No argument with what you're saying but understanding basic accounting is necessary for understanding financial statements just as understanding the alphabet and words is necessary for reading books. Financial statements and reports are covered in introductory accounting classes, or at least they were in mine a few decades ago, Principles of Accounting I and II.

Maybe think of it as taking basic French classes before taking French literature in French.

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Re: How to learn about financial statement analysis?

Post by Lynette » Wed Nov 01, 2017 4:19 pm

Eons ago I did a degree in Accounting. While I'm sure that information is interesting, one has to be aware of what can be disguised. Despite all of the brilliant people analyzing, Enron, they were able to mislead everyone.

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