Free Ebook The Interpretation of Financial Statements, by Benjamin Graham Spencer B. Meredith

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The Interpretation of Financial Statements, by Benjamin Graham Spencer B. Meredith

Free Ebook The Interpretation of Financial Statements, by Benjamin Graham Spencer B. Meredith

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Review

"This reissue of the classic 1937 edition ... is right on time.... [The] basic study of financial statements by the average investor is more important than ever.-From the Introduction by Michael F. Price, president, Franklin Mutual Advisors, Inc."Graham's ideas ... formed the framework of thinking about the stock market that has inspired the investment community for nearly a century."-Smart Money"Graham ranks as this century's (and perhaps history's) most important thinker on applied portfolio investment."-John Train, author of The Money Masters

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From the Back Cover

The volume is Benjamin Graham's timeless guide to interpreting and understanding financial statements. It has long been out of print, but now joins Graham's other masterpieces, The Intelligent Investor and Security Analysis, as the three keys to understanding Graham and value investing. Readers will learn to analyze a company's balance sheets and income statements and arrive at a true understanding of its financial position and earnings record. Graham provides simple tests any reader can apply to determine the financial health and well-being of any company. This volume is an exact text replica of the first edition of The Interpretation of Financial Statements, published by Harper & Brothers in 1937. Graham's original language has been restored, and readers can be assured that every idea and technique presented here appears exactly as Graham intended.

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Product details

Hardcover: 144 pages

Publisher: HarperBusiness; First Edition Thus edition (January 15, 1998)

Language: English

ISBN-10: 9780887309137

ISBN-13: 978-0887309137

ASIN: 0887309135

Product Dimensions:

5 x 0.6 x 7.2 inches

Shipping Weight: 8 ounces (View shipping rates and policies)

Average Customer Review:

4.2 out of 5 stars

67 customer reviews

Amazon Best Sellers Rank:

#54,577 in Books (See Top 100 in Books)

Benjamin Graham (1894-1976) was a pioneer in the field of value investing. He is most famous for being Warren Buffet’s teacher at Columbia Business School. The Interpretation of Financial Statements was originally published in 1937. This 122-page book focuses on the balance sheet and income statement. Graham also wrote Security Analysis, first published in 1934, and The Intelligent Investor, first published in 1949.There are a number of intangible assets on the balance sheet. In the introduction, Michael Price describes an experience early in his career. F&M Schaefer Brewing Company appeared to be trading well below intrinsic value. “I’ll never forget looking at the balance sheet and seeing a +/- $40 million net worth and $40 million in intangibles… I looked in the notes and at the financial statements, but they didn’t reveal where the intangibles figure came from. I called Schaefer’s treasurer [and asked]… He replied, ‘Don’t you know our jingle, Schaefer is the one beer to have when you’re having more than one?’ That was my first analysis of an intangible asset which, of course, was way overstated.”Graham writes about the smoke and mirrors of goodwill. “Many companies which started with a substantial good-will item have written this down to $1 by making corresponding reductions in their surplus or even their capital accounts. This writing down of good-will does not mean that it is actually worth less than before, but only that the management has decided to be more conservative in its accounting policy. This point illustrates one of the many contradictions in corporate accounting. In most cases the writing off of good-will takes place after the company’s position has improved. But this means that the good-will is in fact considerably more valuable than it was at the beginning.”“Patents constitute a somewhat more definite form of asset than good-will. But it is extremely difficult to decide what is the true or fair value of a patent at any given time… The value which the patents are carried on the balance sheet seldom offers any useful clue to their true worth.”“In general, it may be said that little if any weight should be given to the figures in which intangible assets appear on the balance sheet. Such intangibles may have a very large value indeed, but it is the income account and not the balance sheet that offers the clue to this value. In other words, it is the earning power of these intangibles, rather than the balance sheet valuation, that really counts.”It can be insightful to compare figures over several time periods to determine if performance is improving or deteriorating.• “In the working capital is found the measure of the company’s ability to carry on its normal business comfortably and without financial stringency, to expand its operations without the need of new financing, and to meet emergencies and losses without disaster… The growth or decline of the working capital position over a period of years is also worthy of the investor’s attention.”• “Receivables should be studied in relation to the annual sales… and in relation to changes shown over a period of years. If the receivables seem unusually large in proportion to sales, or to other items, there is some indication that an unduly liberal credit policy has been pursued, and that more or less serious losses are likely to be sustained from bad accounts.”• “The most important individual item among the current liabilities is that of Notes Payable. This generally represents bank loans… If the notes payable are substantially exceeded by the cash holdings they can ordinarily be dismissed as relatively unimportant. But if borrowings are larger than the cash and receivables combined, it is clear that the company is relying heavily on the banks… Such a situation may justify misgivings. In such a case the bank loans should be studied over a period of years to see whether they have been growing faster than sales and profits. If they have, it is a definite sign of weakness.”“An abnormally large inventory suggests that a good part of the merchandise may be unsalable and that its price may have to be drastically reduced in order to move it… The chief criterion is the ‘turnover’—defined as the annual sales divided by the inventory… Inventory turnover is important because the more times a year a company can turn its inventory, the less capital is invested in inventory, and there is less chance of loss through obsolete material.”“The book value of a security is in most cases a rather artificial value… Outside of the field of banks, insurance companies, and, particularly, investment trusts, it is only in the exceptional case that book value or liquidating value plays an important role in security analysis. In the great majority of instances the attractiveness or the success of an investment will be found to depend on the earning power behind it.”In a chapter on public utilities, Graham explains, “subsidiary preferred dividends are the dividends paid on preferred stock outstanding in the hands of the public—i.e., not held by the parent company… In dealing with the bonds of public utility and other holding companies, it is usually necessary to consider the subsidiaries’ preferred dividends as fixed charges, for these may have to be paid before there is any income available for the parent company’s bonds.”Approximately one-quarter of the book is a glossary of financial terms. Here are some examples:“Earning Power. Properly, a rate of earnings which is considered as ‘normal,’ or reasonably probable, for the company or particular security. It should be based both upon the past record, and upon a reasonable assurance that the future will not be vastly different from the past. Hence companies with highly variable records or especially uncertain futures may not logically be thought of as having a well-defined earning power.”“Expenditures vs. Expenses. Expenditures are outlays of cash or the equivalent; frequently they involve no concurrent charge against operations or earnings (e.g. Capital Expenditures). Expenses are costs, i.e. charges against current operations or earnings; frequently they involve no concurrent cash expenditure (e.g. Accruals, Depreciation).”“Going Concern Value… The special profit-making character that attaches to a well-established and successful business.”“Good-Will. Intangible Asset purporting to reflect the capitalization of excess future profits expected to accrue as a result of some special intangible advantage held, such as good name, reputation, strategic location, or special connections. In practice, the amount at which good-will is carried on the balance sheet is rarely an accurate measure of its true value.”“Intrinsic Value. The ‘real value’ behind a security issue, as contrasted with its market price. Generally a rather indefinite concept; but sometimes the balance sheet and earnings record supply dependable evidence that the intrinsic value is substantially higher or lower than the market price.”“Joint and Several Guarantee. A guarantee by more than one party under which each party is potentially liable for the full amount involved if his associates do not meet their share of the obligation.”“Junior Issue. An issue whose claim for interest or dividends, or for principal value, comes after some other issue, called a senior issue. Second mortgages are junior to first mortgages on the same property; common stock is junior to preferred stock, etc.”“Leasehold. The right to occupy a property at a specified rental for a specified period of years. To obtain a long term lease at a favorable rental a cash bonus is frequently paid by the lessee to the lessor (owner), if it is a new lease, or to the former lessee, if the lease is taken over. The balance sheet item ‘Leaseholds’ should represent only this cash consideration, and should be amortized over the life of the lease.”“Leasehold improvements. The cost of improvements or betterments to property leased for a period of years. Such improvements ordinarily become the property of the lessor (owner) on expiration of the lease; consequently their cost must be amortized over the life of the lease.”“Protective Covenants. Provisions in a bond indenture, or charter provisions affecting a preferred stock, (a) which bind the company not to do certain things considered injurious to the issue or, (b) which set forth remedies in the event of unfavorable developments. Example of (a): Agreement not to place a lien on the property ahead of the bond issue. Example of (b): The passing of voting power to the preferred stock if dividends are not paid.”“Secular Trend. A long term movement—e.g. of prices, production, etc.—in some definite direction. Opposed to seasonal fluctuations or variations.”“Sinking Fund. An arrangement under which a portion of a bond or preferred stock issue is retired periodically in advance of its fixed maturity...”Michael Price writes, “a stock price must relate to its financials… It is especially common during periods of exuberance or fear that investors depart from the fundamental methods of successful investing… Focus on the fundamentals—how much you are paying for steak and how much for the sizzle—and you shouldn’t go wrong.”Graham concludes, “the investor who buys securities when the market price looks cheap on the basis of the company’s statements, and sells them when they look high on this same basis, probably will not make spectacular profits. But on the other hand, he will probably avoid equally spectacular and more frequent losses. He should have a better than average chance of obtaining satisfactory results. And this is the chief objective of intelligent investing.”

The Interpretation of Financial Statements is a wonderful reference guide for those who want to understand published financial statements and reports. Although some of the information is slightly out of date, you can be sure this book will still be useful in twenty yearsPros Offers an explanation of the most common terms found on financial statements Gives ratios and formulas for investors to calculate Includes many examples Small, easy to carry edition with classic typeface. Makes an excellent business gift for clients and colleagues.Cons Some of the information is dated due to changes in accounting rules The reader should have a working knowledge of stocksAlthough often overlooked, Graham's Interpretation of Financial Statements is undoubtedly as important as his other works (which include Security Analysis and The Intelligent Investor.) While a relatively slim 122 pages, Graham manages to successfully detail and explain the meaning of concepts such as book value, liquidation value, reserves, and the current ratio. I personally have a copy sitting on my desk.

There are some good insights in this book, but keep in mind that it was written 80 (eighty!) years ago, so a lot of terms and accounting practices mentioned in it do not apply any more. Lots of accounting standards have changed since then...

For the most part I found Graham's book to be very useful. It is a quick and informative read with some insights on how to make heads or tails of what you are looking at with an annual or quarterly report. Although there was some disappointment with the Income Statement explanation (which, honestly isn't terribly hard to understand), as well as his focus on railroad and utility companies (with some focus on bonds and preferred stocks, which I have no interest in), I found this to be very helpful.On a whole, this book is excellent for the beginning investor. It is a little out of date, but the core information, as well as reading the words of Graham himself, is worth the read. Graham also applies everything he wrote about to a financial statement, showing exactly what to do, which is an invaluable piece of instruction. Definitely recommend, even if it is for the sample balance sheet analysis alone.

Excellent introduction or refresher to financial statement analysis. Great companion to security analysis by the same author.

Classic. Very Concise. And Clear. Written in 1937, but a great deal of it is applicable today. Warren Buffet constantly mentions Return on Tangible Net Assets. This book describes what it is and explains this apporach. Graham might surprise you on his thoughts about Book Value.Book goes item by item on Balance Sheet and then Income Statement, and later ties them together.I am currently studying Financial Accounting and this book solidified what I've learned so far.I used to have a hard time reading Graham, but if you understand that his whole psyche was to concentrate his efforts on the safety of capital, then his writings become very clear.One thing that disappointed me was that Graham didn't cover Treasury Stock(Buybacks), as they weren't common practice in his day.

This is a real gem. After this reading you will grasp financial statement and be able to spot the all to common misconceptions of things Graham stated regarding investing. It is an easy, clear read with many very short, concise and brilliant chapters.

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