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Financial Statement Analysis and Security Valuation [Paperback]

Stephen H Penman
4.5 out of 5 stars  See all reviews (2 customer reviews)

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Book Description

1 Jun 2009 0071267808 978-0071267809 4
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.

Product details

  • Paperback: 800 pages
  • Publisher: McGraw-Hill Higher Education; 4 edition (1 Jun 2009)
  • Language: English
  • ISBN-10: 0071267808
  • ISBN-13: 978-0071267809
  • Product Dimensions: 20.2 x 25.2 cm
  • Average Customer Review: 4.5 out of 5 stars  See all reviews (2 customer reviews)
  • Amazon Bestsellers Rank: 67,796 in Books (See Top 100 in Books)
  • See Complete Table of Contents

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From the Publisher

Focus on the output of financial statements, not the input (user focus vs. preparer). A number of financial statement analysis texts have chapters that explain how the accounting is done, many with material similar to that in intermediate accounting texts. This text asks what the financial statements tell you, not how they are prepared. However, the user of financial statements has to have some knowledge of accounting. Part 4 of the text covers many accounting details, but in a way that examines accounting methods from the point of view of how they help or hinder analysis. This way, students develop a critical perspective on the accounting to supplement the descriptive one acquired in accounting courses.
The text brings finance and accounting concepts together. In a typical program, students get their accounting "here" and their finance "there." Finance professors often do not cover how accrual accounting helps in valuation and settle for cash-flow analysis. Accounting professors teach accrual accounting and financial statement (ratio) analysis, but sometimes don't make the link to investment questions. This book links accounting and finance so that the financial statement analysis is guided by concepts of finance and central issues in finance equity and debt valuation within an accounting framework.
Penman takes a disciplinary approach to the subject. That is, it builds the analysis from "first principles" in a systematic way so students can see where things are coming from. The author believes that in the area of investments, where there are many suspect techniques, the student needs to have the confidence that the analysis is rigorous and sound. An alternative approach is to teach by metaphor through cases without a formal framework. Cases are included as applications of the analysis, but the book is, in the real sense, a textbook.
The text takes an activist approach to investing (and using financial statements for investing.) It does not assume that the market is efficient. It encourages students to think that a stock might be mispriced, so it gives students a motivation to be active about doing analysis. This in no way prejudges the market efficiency issue. It is a pedagogical device and the student might well discover, through analysis, that a particular stock's price is efficient.
This text shows how to move from concepts to practice. It is "product" oriented in that it aims to show how to build a concrete valuation technology based on the financial statements. Most of the analysis can be built into a spreadsheet program.
This text is "state of the art." It reflects recent developments in research and practice, particularly the use of residual-income (economic profit) techniques. Author Stephen Penman is among the top financial accounting academics in the world. He is extremely well known for his research, which is the framework of this textbook.
Penman incorporates cases, problems, and exercises from real world companies including Wal-Mart and Hewlett-Packard. The real world emphasis is a major strength of the text.The web site will have links to data sources and the financial press, including Standard & Poors (COMPUSTAT) data and Business Week sites, as well as relevant public sites. It will also include additional material and examples and a number of devices to help instructors deliver the course efficiently. --This text refers to an out of print or unavailable edition of this title.

About the Author

Stephen Penman is the L.H. Penney Professor of Accounting at the University of California at Berkeley. He received his Ph.D. from the University of Chicago in 1978. He has published extensively in the Journal of Accounting and Economics, the Journal of Accounting Research, and the Contemporary Accounting Research journal. he currently on the editorial board of the Review of Accounting Studies. He is known around the world for his reserch in Financial Accounting.

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Most Helpful Customer Reviews
5.0 out of 5 stars i love it , because it met my experctation 4 Mar 2013
Format:Paperback|Verified Purchase
it met my expectation, the usage was superb i would love to recommend it to my friends and other people that needed it
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0 of 22 people found the following review helpful
4.0 out of 5 stars review 16 Mar 2010
By rhulan
Look over a week to be delivered but was in good condition when it arrived
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Most Helpful Customer Reviews on (beta) 3.8 out of 5 stars  13 reviews
3 of 3 people found the following review helpful
5.0 out of 5 stars A fantastic book - must for all financial and business analysts 29 Dec 2011
By Kaushik Desarkar - Published on
We had this book as the recommended text book in Strathclyde University (Glasgow) and initially I got a bit knocked out by Penman's approach because finance starts with CASH FLOWS and the writer does not approve the DCF Method. But once I settled into the book, trust me, its a BIBLE for FSA. Because the approach links Economic activity and Eco profit to valuation thus allowing greater clarity in understanding where VALUE actually comes from - something not so explicit when using DCF. And the best part of the book is the the 2-step to obtain FCF against the lengthy approach in Mckinsey Valuations and other text books. A good knowledge of excel can really help you get the best out of the book since using VLOOKUP and SUMIF you can create the templates just as described in the text book.The book does not use complicated language - basic concepts are from standard finance text books - Brealey & Myers, Ross Westerfield Jaffe, but the beauty lies in the way Penman integrates them into a holistic approach that can be used across various GAAPs and business functions.
3 of 3 people found the following review helpful
5.0 out of 5 stars Best Financial Statement Book Period 26 Feb 2010
By James Kociuba - Published on
On Wall Street, this book is a staple. A basic reference that explains financial statement analysis like no other. A must read introduction. The only downside is some of the terms the author uses are a little different than terms used in the Bloomberg or FactSet system, so it takes a little understanding to get that one straight. It will be a long time before someone publishes a better text.
2 of 2 people found the following review helpful
4.0 out of 5 stars The author has passion for the subject (rare!) and tries to merge the finance and accounting perspectives (also rare!) 23 Nov 2012
By Jackal - Published on
Most books on financial statement analysis are written by professors that neither are passionate about the subject nor are interested in practical applications. A recent mistake was to spend $50 on International Financial Statement Analysis (CFA Institute Investment Series). The current book is different because the author really seems to care about the topic and he freely dishes out advice. He is part of the Graham & Dodd value-based investment crowd.

It is hard to find similar material outside textbooks, so you will have to bear with the extremely tedious format of US textbooks (whether you are a student or not). The key alternative is Valuation: Measuring and Managing the Value of Companies, 5th Edition (Wiley Finance), which is written for managers and largely lacks the accounting perspective. If I only could buy one book, that would be my choice.

A strength of the current book is an attempt to bridge the accounting and finance perspectives. Briefly, the accountants like accrual accounting, the finance guys like cash flow, and most of the time they do not talk to each other. The current book presents several ratios and perspectives that could be used in financial model building. In that regard it is more advanced than the recommended book above.

A key weakness with the current book is that it does not go into sufficient depth on important topics in valuation, like goodwill after acquisitions, pension reserves, revenue recognition, capitalisation of R&D, etc. This is a weakness shared with all the textbooks that I have seen. A second key weakness is that the book only covers US accounting standards. I guess it is fair to draw the line somewhere, but for practitioners it is a serious weakness.

The author has a brief book Accounting for Value (Columbia Business School Publishing) focusing on the theory of valuation. Its content is similar, but I actually prefer the textbook because it provides some useful numerical examples. Please also note that at the time of writing this review, there is a fifth edition of the book listed, but it does not seem available for sale yet. I rate the current book four stars.
2 of 2 people found the following review helpful
5.0 out of 5 stars Value Investing 11 April 2012
By Gaby - Published on
Format:Paperback|Verified Purchase
This is the best book I have ever read on Value Investing. He starts with valuing a basic Bank Deposit and builds on that to valuing all securities using simple easily understood concepts - rather than complex financial engineering. Highly recommended.
6 of 9 people found the following review helpful
1.0 out of 5 stars Dissapointed by this book 9 Jun 2010
By kia - Published on
Format:Hardcover|Verified Purchase
This book is extremely disorganized and doesn't fully explain very important concept. For the purpose of valuation you need to know subjects like calculation of cost of debt, cost of equity, and.... in details. This book writes about cost of debt just one paragraph. How do you measure weights in calculation of cost of capital? Should it be book value or market value? What happens when company doesn't issue corporate bond? I have read other books one of them Financial Reporting, Financial Statement Analysis, and Valuation from Stickney, Brown and Wahlen. It is very comprehensive, structured and organized and explain everything in detail with lots of examples and practices. Contrary to this book it has unfairly received bad ratings becasue some people find it a bit complicated. But that is the way it is if you want to learn valuation and forcasting and you should know some accounting before studying that.
In short with this book you don't learn valuation if you are a beginner and if you are a pro you don't need this.
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