Analysis of Financial Statements

PAMELA PETERSON DRAKE, PHD, CFA, is the J. Gray Ferguson Professor of Finance and Head of the Department of Finance and Business Law in the College of Business at James Madison University. Prior to joining James Madison, she was an associate dean and professor of finance at Florida Atlantic University and, previous to that, a professor at Florida State University. She has published articles in numerous journals and collaborated with Frank Fabozzi on the previous edition of this book as well as Foundations and Applications of the Time Value of Money, Capital Budgeting, and Financial Management and Analysis, all published by Wiley. She received a BS in accountancy from Miami University and her PhD in finance from The University of North Carolina at Chapel Hill. FRANK J. FABOZZI, PHD, CFA, CPA, is Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute. Prior to joining EDHEC in August 2011, he held various professorial positions in finance at Yale University's School of Management from 1994 to 2011 and was a visiting professor of finance and accounting at MIT's Sloan School of Management from 1986 to 1992. He is also editor of the Journal of Portfolio Management.

• Preface xiAbout the Authors xiiiPart One The Basics 1Chapter 1 Introduction 3What Is Financial Analysis? 4Where Do We Find the Financial Information? 8Who Gets What Type of Information and When? 10What Does Sarbanes-Oxley Mean to Companies and Investors? 28What Does the Dodd-Frank Act Mean for Companies and Investors? 32Summary 34Review 35Chapter 2 Financial Statements 37Accounting Principles: What Are They? 37What Do the Basic Financial Statements Tell Us? 39Accounting Flexibility 56How Does Accounting in the United States Differ from Accounting Outside of the United States? 58Summary 59Review 60Chapter 3 The Quality of Financial Information 63It’s All in the Timing 65Too Many Choices? 76So What’s Their Business? 86Restatements and Financial Analysis 87Tell-Tale Signs 90Summary 92Review 95Part Two Analysis of Financial Statements 99Chapter 4 Financial Analysis 101What Are Financial Ratios and How Do We Use Them? 102What Are the Different Types of Financial Ratios? 105Analysis of Return-on-Investment Ratios 122How Can We Use Common-Size Analysis to Analyze Financial Statements? 127Integrated Ratio Analysis 130What Are the Pitfalls and Pratfalls of Financial Ratio Analysis? 137Summary 143Review 144Chapter 5 Equity Analysis 147Earnings 147Price-Earnings Ratio 158Dividends 161Other Fundamentals 173Book-to-Market Ratio 175Summary 178Review 179Chapter 6 Cash Flow Analysis 181Measures of Cash Flow 181Cash Flows and the Statement of Cash Flows 184Free Cash Flow 189The Usefulness of Cash Flows in Financial Analysis 196Summary 202Review 203Part Three Applying Financial Analysis 205Chapter 7 Measuring Company Performance 207Traditional Performance Measures 210Measures of Value Added 212Summary 237Review 238Chapter 8 Corporate Credit Analysis 241Types of Credit Risk 241Factors to Consider in Corporate Credit Analysis 252Summary 263Review 264Chapter 9 Analysis of Equity Risk Using Fundamentals Factor Models 267Measuring Risk 267Asset Pricing Model 271Factor Models 275Fundamental Factor Models 276Summary 280Review 281Chapter 10 The Lessons We Learn 283The Lessons 288The Future of Financial Analysis in the Post-Crisis Era 298Review 299Answers to End-of-Chapter Questions 301Index 305