Discounted value buffett describes is the present

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- ~ discounted value Buffett describes is the present (today's) value of the cash flows the company expects to generate in '" future. Cash is generated when companies are well managed and operate profitably and efficiently. Warren Buffett provides some especially useful investment guidance in his Chairman's letter from a prior period's 3a1<shire Hathaway annual report: (continued on next page) 1-2
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Framework for Analysis and Valuation (continued from previous page) Three suggestions for investors: First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen. Second, unintelligible footnotes usually indicate untrustworthy management. If you can't understand a footnote or other managerial expla- nation, it's usually because the CEOdoesn't want you to. Enron's descriptions of certain transactions still baffle me. Finally, be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranqUil, no- surprise environment, and earnings simply don't advance smoothly (except, of course, in the offering books of investment bankers). This book explains Buffett's references to stock option accounting and pension assumptions as well as a host of other accounting issues that affect interpretation and valuation of companies' financial performance. We will analyze and interpret the footnotes, which Buffett views as crucial to quality financial reporting and analysis. Our philosophy is simple: we must understand the intricacies and nuances of financial reporting to become critical readers and users of financial reports for company analysis and valuation. 03: :DO C)c ~C Zr- N m ~ -I - o Z Sources: Berkshire Hathaway IO-K Reports, Berkshire Hathaway Annual Reports; The Wall Street Journal, January 2012. , .•...•~- . ?W c -.=)6-' 'M I I I I -I Business Environment and Adjusting and Assessing Accounting Information Financial Information Forecasting and Valuation Reporting on Business Activities Choices in Financial Reporting Forecasting Financial Demand for and Supply of Analysis of Financial Statements Performance and Financial Accounting Information Return on Assets Disaggregation Condition II Review of Financial Statements Profitability and Productivity II Company Valuation for Business II Analyzing the Business Decisions Environment II Financial Statement Analysis in an Efficient Capital Market Financial statement analysis is the process of extracting information from financial statements to better understand a company's current and future performance and financial condition.
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