Security Analysis and Business Valuation on Wall Street,: A ... - lib

CHAPTER 8Financial Statement <strong>Analysis</strong>of an Established <strong>Business</strong>With the knowledge gained from the company-specific review, the practitionercommences his financial statement analysis. This chapter examinesthe mechanics of real-life financial statements <strong>and</strong> considers numerous examples.The use of ratios <strong>and</strong> comparable-company statistics help establisha firm’s earnings power.The stock selection process involves a large component of expectations. The investoris usually a student of the intrinsic value <strong>and</strong> relative value, <strong>and</strong> he incorporatesprojections routinely into stock evaluations. In order to form a reasonable basis forpredicting corporate performance, however, the investor must underst<strong>and</strong> historicalfinancial results. The business review set forth in the previous chapter enables thepractitioner to attach product innovations, competitive struggles, <strong>and</strong> other qualitativeitems to changes in sales <strong>and</strong> earnings. As the numerical complement to thebusiness review, the financial analysis provides a statistical summary of the company’spast by boiling it down to the common denominator of all profit-seekingenterprises—dollars <strong>and</strong> cents.Model Research Report1. Introduction2. Macroeconomic Review3. Relevant Stock Market Prospects4. Review of the Company <strong>and</strong> Its <strong>Business</strong>5. Financial <strong>Analysis</strong> ̌6. Financial Projections7. Application of <strong>Valuation</strong> Methodologies8. RecommendationTo a large extent, financial statement analysis is a lost art. Few business schoolsstress the topic, <strong>and</strong> MBA students who major in finance graduate with only arudimentary knowledge of accounting, the nuts <strong>and</strong> bolts of financial statementanalysis. Wall Street <strong>and</strong> the institutional community deemphasize a careful studyof prior financial results. Research departments are so preoccupied with predicting119