Financial Statement Analysis and Security Valuation

by Stephen H. Penman

This book describes valuation as an exercise in financial statement analysis. Students learn to view a firm through its financial statements and to carry out the appropriate financial statement analysis to value the firm's debt and equity. The book takes an activist approach to investing, showing how the analyst challenges the current market price of a share by analyzing the fundamentals. With a careful assessment of accounting quality, accounting comes to life as it is integrated with the modern theory of finance to develop practical analysis and valuation tools for active investing.

Genres: Finance, Business, Textbooks, Accounting, Economics, Reference, Nonfiction

800 pages, Hardcover

First published January 1, 2000

Reviews

[Heiko Daniel · Rating 5 out of 5]

I have read most editions of this book over the last ten or fifteen years. This continues to be the single best textbook on financial statement analysis I've ever come across. It's particularly strong at the intersection of valuation and accounting matters. Professor Penman gets to the bottom of everything. His writing is clear, his analysis thorough, he explains well. Where many accounting texts are detail-oriented, this is rooted in principles (the right approach to accounting); where many corporate finance texts are not concerned with the accounting, on the implicit or explicit understanding that it does not matter to valuation, Professor Penman reconciles the two, both in concept and in practical terms.
This is not an introductory text, though it starts at a basic level; in my view, anyone who has read and understood the entire book will have a deep, up-to-date understanding of financial statement analysis.

[Adrian · Rating 3 out of 5]

This book goes really deep into valuation of firms and accounting and it definetly gave me some new ways of seeing businesses and the way they create value !

Some very interesting points:

- when evaluating a company always take into account the residual earnings of that company over a period of time. If a company has more sells it doesnt mean its more profitable. If i sell 2 dognut and then i but machinery and sell 10 dognuts i am not more profitable...i just invested more money into equipemnt , my operation is not more profitable.
Some very important measures:
RNOA- return on operating assets
NOA- net operating assets
OI- operating income
Residual earnings
Abnormal growth


- take into account the required rate of return when evaluating profits. If i invest in Microsoft and it has a growth of 10% /per year , i also should take into account that my money is locked for one year and therefore i should get paid for the cost of capital. Lets say my required rate of return is 10% , and MSFT grows with 10% per year , than it means there is no residual earnings/abnormal growth...i could keep my money elsewhere.

- try to get to the core earnings of the operation, the earnings that are made from the usual activities of the company ! If MSFT makes 10 dollars/year but it makes 6 from financing operations ( interest on some buildings it has leased) , 1 from selling a one time deal item (like a building) and only 3 from selling software...then i am interested in only those 3 dollars.
We should take out profits made from non-core operations , or from one time deals the company made

- how stock options of employees deteriorate value for shareholders in the future when the right of exercising said options is used

This book is deep and solid but its calculations are hard to follow (even for someone that has read his share of financial/accounting books , though without a degree in accounting) without a pen and a paper.
Even without the arithmetics it still has quite alot of value and it digs deep into the components that generate value within a company !

The book is separated within 4 parts each with a couple of chapters.
Each chapter comtains a theory and mini cases followed by exercises.
The exercises part is the hard one to follow.


Would have been a 4 star if the calculus part was more concise and a bit more simplified.

[Laurynas Nava · Rating 5 out of 5]

Not your regular too basic introductory book. Good pace and a lot of valuable topics.

[Jareen Binte Asad · Rating 4 out of 5]

This book goes beyond the surface of financial statement analysis and dives deep into the principles of valuation, making it a must-read for both finance students and seasoned professionals.

[Iain Hamill · Rating 5 out of 5]

Great textbook for getting to grips with financial stats.

[Colin · Rating 5 out of 5]

Very comprehensive. More important: the book describes the process of valuation with lots of simple, yet effective analysis.