Book: Financial Statement Analysis
Author: Marty Fridson, Fernando Alaverez
Key takeaways: This is a good book which one should read if one is a beginner-intermediate, but I am not certain whether this would be sufficiently helpful if you were familiar with financial modeling and have earned your share of skepticism for financial statements. This book is certainly interesting in the way that it brings together parts of FSA and parts of financial fine print sleuthing, which is a very practical way to think about it. Having read my share of books on financial fine print and FSA, I wasn’t blown away but below are some points that I found were increment to my knowledge.
Why Management Push the Limits?: Fridson and Alvarez say that if you’re an entrepreneur who has built a company from nothing to a $300 mm entity, you’re probably the kind of person who believes that it could go bigger and problems that you’re facing now are merely temporary and simply a stop on the road. With that in mind, it is easy to imagine why management may push a limits a little. They also cite Michael Jensen who says that when compensation is tied to hitting certain #s, you can be certain that (a) bar is going to be low, and (b) people will try to do a lot of cross that bar.
SEC: Pay attention when SEC upgrades its inquiry into a company into a formal investigation (see Nortel saga)
Rebates: These are a frequently abused element of expense recognition.
EBITDA: Credit analysts use Debt/EBITDA as a cornerstone of their analysis, and all of this started with the influential 1966 study by William H. Beaver, which found (Net Income + D&A) as the best predictor of corporate bankruptcy. Beaver didn’t add back interest or taxes and didn’t recommend relying solely on this one metric, despite today’s focus on this metric since.