Chapter 19 – Financial Statement Analysis
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CHAPTER NINETEEN
FINANCIAL STATEMENT ANALYSIS
CHAPTER OVERVIEW
This chapter discusses the basic financial statements, the differences between accounting and economic
LEARNING OBJECTIVES
After studying this chapter, the student should be able to analyze a firm using the basic financial
PRESENTATION OF MATERIAL
19.1 Major Financial Statements
The purpose of performing financial statement analysis is to use the firm’s accounting data in the security
valuation process. An analyst can use the actual financial statements or use financial ratios constructed
from the financial statements. Financial statement analysis can often lead the analyst to examine certain
19.2 Measuring Firm Performance
Manager responsibilities:
19.3 Profitability Measures
Common profitability measures are discussed. Students learn that ROE is a key determinant of earnings
growth and is discussed in depth later in the chapter (the previous chapter as well). The concept of
Chapter 19 – Financial Statement Analysis
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19.4 Ratio Analysis
The DuPont system decomposes ROE (it might be useful to students to point out the origins of the
DuPont system). The decomposition process allows an analyst to see what factors have the most
significant influence on the summary measure. For example, analysis and comparison of the factors 3, 4
and 5 (from Equation 19.2) highlight profit margin on sales, total asset turnover and leverage (equity
19.5 Illustration of Financial Statement Analysis
19.6 Comparability Problems
Since financial ratios are based on accounting data, an analyst must be aware of differences in accounting
methods that could affect comparison of ratios. This section presents examples of the some of the key
problems of comparability. Inventory valuation method is an important factor since it influences cost of
19.7 Value Investing: The Graham Technique
Chapter 19 – Financial Statement Analysis
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With the publication of Security Analysis, Graham became an important thinker, writer, and teacher in the