Financial Statement Analysis

"Once a corporation's manager accept the premise that financial statements are instruments for maximizing shareholder wealth, they will soon see that the potential for enhancing value is considerable."

"Whatever its strengths, however, the historical cost system also has disadvantages that are apparent even to the beginning student of accounting."

"The purportedly ideal measure of equity is market capitalization, defined as the market-determined value of all outstanding shares of a company's stock."

"Executives whose bonuses rise in tandem with earnings-per-share have a strong incentive not only to generate bona fide earnings, but also to use every lawful means of inflating the figures through accounting sleight of hand."

"In the arithmetic of the income statement, the main method of increasing reported income?besides artificially increasing revenues . . . is to reduce expenses by . . . sleight of hand. "

"The characteristic growth patterns of firms at various stages in the company life cycle correspond to typical patterns of cash generation and usage."

"Financial flexibility can translate directly into operating flexibility. Keeping cash "trapped" in marketable securities can enable a firm to gain an edge over "lean-and-mean" competitors . . ."

"Notwithstanding their potential for widely missing the mark, multi-year projections are essential to the financial analysis of certain situations."

"Financial statements tell much about a borrower's ability to repay a loan, but disclose little about the equally important willingness to repay."

"Borrowers sometimes argue that the total debt calculation should exclude debt that is convertible, at the lender's option, into common equity."

"In calculating profit margins, analysts should eliminate the effect of extraordinary gains and losses to determine the level of profitability that is likely to be sustainable in the future."

"For capital-intensive manufacturers and utilities, a key ratio to watch is cash flow to capital expenditures."

"Several different methods of fundamental common stock analysis have been devised over the years, but few match the intuitive appeal of regarding the stock price as the discounted value of expected future dividends."

"Beside evaluating a company's discrete businesses on the basis of prevailing earnings or cash flow multiples, analysts can often put prices on specific assets identified in the financial statements."

"It is essential to familiarize oneself with the financial reporting practices of the country in which a firm is domiciled before attempting to compare its financials with those of another company that is subject to a different set of rules."

"In addition to assessing the extent to which a company has deliberately left itself exposed both to investment and marketing risk, the insurance analyst must deal with another set of risks related to the industry's dual accounting system."