Martin Fridson, - Statement A Practitioner's Guide


An updated guide to the essential discipline of financial statement analysis

In Financial Statement Analysis, Fourth Edition, leading investment authority returns with to provide the analytical framework you need to scrutinize financial statements, whether you're evaluating a company's stock price or determining valuations for a merger or acquisition.

This fully revised and up-to-date Fourth Edition offers fresh information that will help you to evaluate financial statements in today's volatile markets and uncertain economy, and allow you to get past the sometimes biased portrait of a company's performance.

  • Reflects changes in the financial reporting landscape, including issues related to the financial crisis of 2008-2009
  • Provides guidelines on how to interpret balance sheets, income statements, and cash flow statements
  • Offers information for maximizing the accuracy of forecasts and a structured approach to credit and equity evaluation

Filled with real-life examples and expert advice, Financial Statement Analysis, Fourth Edition will help you gain a firm understanding of the techniques that will help you interpret financial statements, which are designed to conceal more than reveal.

Table of Contents

Preface to Fourth Edition xi

Acknowledgments xv

PART ONE - Reading Between the Lines

  • CHAPTER 1 - The Adversarial Nature of Reporting 3
    • The Purpose of Reporting 4
    • The Flaws in the Reasoning 8
    • Small Profits and Big Baths 11
    • Maximizing Growth Expectations 12
    • Downplaying Contingencies 18
    • The Importance of Being Skeptical 20
    • Conclusion 24

PART TWO - The Basic Statements

  • CHAPTER 2 - The Balance Sheet 29
    • The Value Problem 30
    • Comparability Problems in the Valuation of Assets 32
    • Instantaneous Wipeout of Value 34
    • How Good Is Goodwill? 35
    • Losing Value the Old-Fashioned Way 38
    • True Equity Is Elusive 40
    • Pros and Cons of a Market-Based Equity Figure 41
    • The Common Form Balance Sheet 43
    • Conclusion 45
  • CHAPTER 3 - The Income Statement 47
    • Making the Numbers Talk 47
    • How Real Are the Numbers? 52
    • Conclusion 77
  • CHAPTER 4 - The Statement of Cash Flows 79
    • The Cash Flow Statement and the
    • Leveraged Buyout 81
    • Analytical Applications 86
    • Cash Flow and the Company Life Cycle 87
    • The Concept of Flexibility 99
    • In Defense of Slack 104
    • Conclusion 106

PART THREE - A Closer Look at Profits

  • CHAPTER 5 - What Is Profit? 111
    • Bona Fide Profits versus Accounting Profits 111
    • What Is Revenue? 112
    • Which Costs Count? 114
    • How Far Can the Concept Be Stretched? 116
    • Conclusion 117
  • CHAPTER 6 - Revenue Recognition 119
    • Channel-Stuffing in the Drug Business 119
    • A Second Take on Earnings 123
    • Astray on Layaway 127
    • Recognizing Membership Fees 128
    • A Potpourri of Liberal Revenue
    • Recognition Techniques 131
    • Fattening Earnings with Empty Calories 132
    • Tardy Disclosure at Halliburton 138
    • Managing Earnings with Rainy Day Reserves 141
    • Fudging the Numbers: A Systematic Problem 143
    • Conclusion 147
  • CHAPTER 7 - Expense Recognition 149
    • Nortel’s Deferred Profit Plan 149
    • Grasping for Earnings at General Motors 154
    • Time-Shifting at Freddie Mac 157
    • Conclusion 159
  • CHAPTER 8 - The Applications and Limitations of EBITDA 161
    • EBIT, EBITDA, and Total Enterprise Value 162
    • The Role of EBITDA in Credit 166
    • Abusing EBITDA 169
    • A More Comprehensive Cash Flow Measure 171
    • Working Capital Adds Punch to Cash
    • Flow 174
    • Conclusion 176
  • CHAPTER 9 - The Reliability of Disclosure and Audits 179
    • An Artful Deal 180
    • Death Duties 183
    • Systematic Problems in Auditing 184
    • Conclusion 189
  • CHAPTER 10 - Mergers-and-Acquisitions Accounting 191
    • Maximizing Postacquisition Reported Earnings 191
    • Managing Acquisition Dates and Avoiding Restatements 195
    • Conclusion 197
  • CHAPTER 11 - Is Fraud Detectable? 199
    • Telltale Signs of Manipulation 199
    • Fraudsters Know Few Limits 201
    • Enron: A Media Sensation 201
    • HealthSouth’s Excruciating Ordeal 210
    • Milk and Other Liquid Assets 217
    • Conclusion 221

PART FOUR - Forecasts and Security Analysis

  • CHAPTER 12 - Forecasting Statements 225
    • A Typical One-Year Projection 225
    • Sensitivity with Projected Statements 237
    • Projecting Flexibility 242
    • Pro Forma Statements 245
    • Pro Forma Statements for Acquisitions 246
    • Multiyear Projections 253
    • Conclusion 263
  • CHAPTER 13 - Credit 265
    • Balance Sheet Ratios 266
    • Income Statement Ratios 275
    • Statement of Cash Flows Ratios 280
    • Combination Ratios 283
    • Relating Ratios to Credit Risk 290
    • Conclusion 304
  • CHAPTER 14 - Equity 307
    • The Dividend Discount Model 308
    • The Price-Earnings Ratio 313
    • Why P/E Multiples Vary 316
    • The Du Pont Formula 324
    • Valuation through Restructuring Potential 328
    • Conclusion 334

APPENDIX - Explanation of Pro Forma Adjustments for Hertz Global Holdings, Inc./DTG 335

Notes 341

Glossary 353

Bibliography 367

About the Authors 369

Index 371

Author Information

MARTIN FRIDSON is a Global Credit Strategist at BNP Paribas Investment Partners, one of the world's largest asset managers. Over a twenty-five-year span with brokerage firms including Salomon Brothers, Morgan Stanley, and Merrill Lynch, he became known for his innovative work in credit analysis and investment strategy. Fridson has served as president of the Fixed Income Analysts Society, governor of the Association for Investment Management and Research (now CFA Institute), and director of the New York Society of Security Analysts.

FERNANDO ALVAREZ is currently an Adjunct Associate Professor of Finance and Economics at the Columbia University Graduate Business School, where he teaches entrepreneurship finance. From 2003 until 2008, he was associate professor in the Finance and Economics Department and director of entrepreneurship programs at Rutgers Business School, Newark, and New Brunswick. Alvarez has taught at New York University's Stern School of Business where he was an associate professor on innovation and entrepreneurship, and Babson College where he was assistant professor of finance.


"Financial Statement Analysis: A Practitioner's Guide is a well-organized, thorough exploration of the challenges facing practitioners who rely on financial statements to make investment and lending decisions. Reference books about accounting, while valuable for their insights, are seldom this enjoyable to read. This book is different because the authors seamlessly integrate fascinating real-life examples and instructive fictional scenarios into each chapter to illustrate their points. For anyone with a passing interest in the subject, or for new analysts learning the trade, Financial Statement Analysis is an amazing resource." —Christopher Shayne, CFA, Director of Product Operations for Enterprise Risk Solutions at Moody's Analytics

"Any book that reaches its 4th edition (updated to 2011) should be good. That's true in spades for Financial Statement Analysis. Fridson and Alvarez have written a classic. It should be required reading and a constant reference source on the bookshelf of any investor intending to buy individual company stocks or bonds." —Canadian DIY blog

"In the 1990s, Benjamin Graham's Security served as [Value Partners’] reference book, but since then they have been using Martin Fridson's Statement Analysis: A Practioner's Guide." —excerpt from The Value Investors: Lessons from the World's Top Fund Managers by Ronald Chan, Bruce C. N. Greenwald (Foreword)

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