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Unformatted text preview: The principal activity of security analysis is to value firms o Security analysts collect & analyze a wide array of info from financial statements & other sources to evaluate a firms current & past performance & to predict its future performance o Then they use the expected future performance to measure the value of the firms shares o Comparisons of the analysts estimates of the firms share value w/the market price for the shares provide the basis for making good investment decisions Overview of Financial Statement Analysis We view effective financial statement analysis as a 3 legged stool; the 3 legs of the stool represent defective analysis based on the following: o 1. Identifying the economic characteristics of the industries in which a firm participates & the relation of those economic characteristics to various financial statement ratios o 2. Describing the strategies that a firm pursues to differentiate itself from competitors as a basis for evaluating a firms competitive advantages, the sustainability of a firms earnings, & its risks o 3. Evaluating the financial statements, including the accounting concepts & methods that underlie them & the quality of the info they provide One approach to effective analysis of financial statements for valuation & many other decisions involves 6 interrelated sequential steps: o 1. Identify the economic characteristics & competitive dynamics of the industry in which a particular firm participates What dynamic forces drive competition in the industry? o 2. Identify the strategies the firm pursues to gain & sustain a competitive advantage What business model is the firm executing to be different & successful in its industry? Does the firm have competitive advantages? If so, how sustainable are they? Are its products designed to meet the needs of specific market segments or are they intended for a broader consumer market? Has the firm integrated backward into the growing or manufacture of RM for its products? Has the firm integrated forward into retailing to final consumers? Is the firm diversified across several geographic markets or industries? o 3. Assess the quality of the firms financial statements and, if necessary, adjust them for such desirable characteristics as sustainability or comparability Do the firms financial statements provide an informative & complete representation of the firms economic performance, financial position, & risk? Has the firm prepared its financial statements in accordance w/GAAP in the US or some other country, or are they prepared in accordance w/the IFRS established by the IASB? Does the balance sheet provide a faithful representation of the economic resources & obligations of the firm?...
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- Fall '09