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The Interpretation of Financial Statements
"All investors, from beginners to old hands, should gain from the use of this guide, as I have."
From the Introduction by Michael F. Price, president, Franklin Mutual Advisors, Inc. Benjamin Graham has been called the most important investment thinker of the twentieth century. As a master investor, pioneering stock analyst, and mentor to investment superstars, he has no peer. The volume you hold in your hands is 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 priceless keys to understanding Graham and value investing. The advice he offers in this book is as useful and prescient today as it was sixty years ago. As he writes in the preface, "if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of security analysis." Written just three years after his landmark Security Analysis, The Interpretation of Financial Statements gets to the heart of the master's ideas on value investing in astonishingly few pages. 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. Highly practical and accessible, it is an essential guide for all business people--and makes the perfect companion volume to Graham's investment masterpiece The Intelligent Investor.
From the Introduction by Michael F. Price, president, Franklin Mutual Advisors, Inc. Benjamin Graham has been called the most important investment thinker of the twentieth century. As a master investor, pioneering stock analyst, and mentor to investment superstars, he has no peer. The volume you hold in your hands is 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 priceless keys to understanding Graham and value investing. The advice he offers in this book is as useful and prescient today as it was sixty years ago. As he writes in the preface, "if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of security analysis." Written just three years after his landmark Security Analysis, The Interpretation of Financial Statements gets to the heart of the master's ideas on value investing in astonishingly few pages. 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. Highly practical and accessible, it is an essential guide for all business people--and makes the perfect companion volume to Graham's investment masterpiece The Intelligent Investor.
144 pages, Hardcover
First published January 1, 1955
About the author
Benjamin Graham
120 books1,584 followersBenjamin Graham was a British-born American financial analyst, investor and professor. He is widely known as the "father of value investing", and wrote two of the discipline's founding texts: Security Analysis (1934) with David L. Dodd, and The Intelligent Investor (1949). His investment philosophy stressed independent thinking, emotional detachment, and careful security analysis, emphasizing the importance of distinguishing the price of a stock from the value of its underlying business.
After graduating from Columbia University at age 20, Graham started his career on Wall Street, eventually founding Graham–Newman Corp., a successful mutual fund. He also taught investing for many years at Columbia Business School, where one of his students was Warren Buffett. Graham later taught at UCLA Anderson School of Management at the University of California, Los Angeles.
Graham laid the groundwork for value investing at mutual funds, hedge funds, diversified holding companies, and other investment vehicles. He was the driving force behind the establishment of the profession of security analysis and the Chartered Financial Analyst designation. He also advocated the creation of index funds decades before they were introduced. Throughout his career, Graham had many notable disciples who went on to earn substantial success as investors, including Irving Kahn and Warren Buffett, who described Graham as the second most influential person in his life after his own father. Among other well-known investors influenced by Graham were Charles D. Ellis, Mario Gabelli, Seth A. Klarman, Howard Marks, John Neff and John Marks Templeton.
After graduating from Columbia University at age 20, Graham started his career on Wall Street, eventually founding Graham–Newman Corp., a successful mutual fund. He also taught investing for many years at Columbia Business School, where one of his students was Warren Buffett. Graham later taught at UCLA Anderson School of Management at the University of California, Los Angeles.
Graham laid the groundwork for value investing at mutual funds, hedge funds, diversified holding companies, and other investment vehicles. He was the driving force behind the establishment of the profession of security analysis and the Chartered Financial Analyst designation. He also advocated the creation of index funds decades before they were introduced. Throughout his career, Graham had many notable disciples who went on to earn substantial success as investors, including Irving Kahn and Warren Buffett, who described Graham as the second most influential person in his life after his own father. Among other well-known investors influenced by Graham were Charles D. Ellis, Mario Gabelli, Seth A. Klarman, Howard Marks, John Neff and John Marks Templeton.
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July 21, 2017
Some points worth noting:
1. A BALANCE sheet shows how a company stands at a given moment. There is no such thing as a balance sheet covering the year 1954;
2. In general, the more liquid the current assets, the less the margin needed above current liabilities. Railroads and public utilities have not generally been required to show a large current ratio, chiefly because they have small inventories and their receivables are promptly collectible.
3. If the inventory is of a readily salable kind, and particularly if the nature of the business makes it very large at one season and quite small at another, the failure of a company to meet this latter quick asset test" may not be of great importance.
In every such case, however, the situation must be looked into with some care to make sure that the company is really in a comfortable current position.
4. Where the cash holdings are exceptionally large in relation to the market price of the securities, this factor usually deserves favorable investment attention. In such a case the stock may be worth more than the earning record indicates, because a good part of the value is represented by cash holdings which contribute little to the income account. Eventually the stockholders are likely to get the benefit of these cash assets, either through their distribution or their more productive use in the business.
5. As in the case of inventories, receivables should be studied in relation to the annual sales and in relation to changes shown over a period of years. Any sudden increase in receivables as a percentage of sales may indicate that an unduly liberal credit policy is being extended in an effort to sustain the volume.
6. The accounts receivable require the most careful scrutiny in the case of companies selling goods on a long-term payment basis. This group includes department stores, credit chains, and mail-order houses.
7. The comparison of inventory turnover among companies within an industry will in many cases reveal an important competitive advantage which marks the leading companies in the group. But this fact in itself is not conclusive unless all the companies being compared are using the same basis for valuing their inventory.
8. If the notes payable are substantially exceeded by the cash holdings, they can ordinarily be dismissed as relatively unimportant. But if the borrowings are larger than the cash and receivables combined, it is clear that the company is relying heavily on the banks. Unless the inventory is of unusually liquid character, 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.
9. During the past forty years investors have come to pay less and less attention to the asset values shown by a company and to place increasing weight upon its earnings record and earnings prospects. This change in attitude was due in part to the frequent unreliability of the property-account figure, but it had separate justification in the fact that for the typical going business value does reside in earning power much more than in assets.
We think the pendulum has swung too far in the direction of ignoring balance sheet values. The property account should neither be accepted at face amount nor overlooked entirely. It deserves reasonable consideration in appraising the company's securities.
10. A consolidated balance sheet eliminates the securities held in wholly owned (and often in majority owned) subsidiary companies, including instead the actual assets and liabilities of the subsidiaries as if they were part of the parent company. But the interest in partly owned subsidiary and affiliated enterprises may appear even in consolidated balance sheets under the heading of "non-current investments and advances."
11. In general, it may be said that little if any weight should be given to the figures at 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 their balance-sheet valuations, that really counts.
12. The book value really measures, therefore, not what the stockholders could get out of their business (its liquidating value), but rather what they have put into the business, including undistributed earnings.
13. It is true that in many individual cases we find companies with small asset values earning large profits, while others with large asset values earn little or nothing. Yet in these cases some attention must be given to the book-value situation. For there is always a possibility that large earnings on the invested capital may attract competition and thus prove temporary; also that large assets, not now earning profits, may later be made more productive, or they may be merged, sold as a whole, or liquidated piecemeal for well above the depressed market level of the stock.
14. BROADLY speaking, the price of common stocks is governed by the prospective earnings and dividends.
15. Thus two common stocks may show the same current earnings per share, may be paying the same dividend rate, and be in equally good financial condition. Yet stock A may be selling at twice the price of stock B, simply because security buyers believe that stock A is going to earn a good deal more than B next year and the years after.
16a. When neither boom nor deep depression is affecting the market, the judgment of the public on individual issues, as indicated by market prices, is usually fairly good. If the market price of some issue appears out of line with the facts and figures available, it will often be found later that the price is discounting future developments not then apparent on the surface. There is, however, a frequent tendency on the part of the stock market to exaggerate the significance of changes in earnings both in a favorable and unfavorable direction. This is manifest in the market as a whole in periods of both boom and depression, and it is also evidenced in the case of individual companies at other times.
16b. At bottom the ability to buy securities—particularly common stocks—successfully is the ability to look ahead accurately. Looking backward, however carefully, will not suffice, and may do more harm than good. Common stock selection is a difficult art, naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future.
17. The investor who buys securities only 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.
1. A BALANCE sheet shows how a company stands at a given moment. There is no such thing as a balance sheet covering the year 1954;
2. In general, the more liquid the current assets, the less the margin needed above current liabilities. Railroads and public utilities have not generally been required to show a large current ratio, chiefly because they have small inventories and their receivables are promptly collectible.
3. If the inventory is of a readily salable kind, and particularly if the nature of the business makes it very large at one season and quite small at another, the failure of a company to meet this latter quick asset test" may not be of great importance.
In every such case, however, the situation must be looked into with some care to make sure that the company is really in a comfortable current position.
4. Where the cash holdings are exceptionally large in relation to the market price of the securities, this factor usually deserves favorable investment attention. In such a case the stock may be worth more than the earning record indicates, because a good part of the value is represented by cash holdings which contribute little to the income account. Eventually the stockholders are likely to get the benefit of these cash assets, either through their distribution or their more productive use in the business.
5. As in the case of inventories, receivables should be studied in relation to the annual sales and in relation to changes shown over a period of years. Any sudden increase in receivables as a percentage of sales may indicate that an unduly liberal credit policy is being extended in an effort to sustain the volume.
6. The accounts receivable require the most careful scrutiny in the case of companies selling goods on a long-term payment basis. This group includes department stores, credit chains, and mail-order houses.
7. The comparison of inventory turnover among companies within an industry will in many cases reveal an important competitive advantage which marks the leading companies in the group. But this fact in itself is not conclusive unless all the companies being compared are using the same basis for valuing their inventory.
8. If the notes payable are substantially exceeded by the cash holdings, they can ordinarily be dismissed as relatively unimportant. But if the borrowings are larger than the cash and receivables combined, it is clear that the company is relying heavily on the banks. Unless the inventory is of unusually liquid character, 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.
9. During the past forty years investors have come to pay less and less attention to the asset values shown by a company and to place increasing weight upon its earnings record and earnings prospects. This change in attitude was due in part to the frequent unreliability of the property-account figure, but it had separate justification in the fact that for the typical going business value does reside in earning power much more than in assets.
We think the pendulum has swung too far in the direction of ignoring balance sheet values. The property account should neither be accepted at face amount nor overlooked entirely. It deserves reasonable consideration in appraising the company's securities.
10. A consolidated balance sheet eliminates the securities held in wholly owned (and often in majority owned) subsidiary companies, including instead the actual assets and liabilities of the subsidiaries as if they were part of the parent company. But the interest in partly owned subsidiary and affiliated enterprises may appear even in consolidated balance sheets under the heading of "non-current investments and advances."
11. In general, it may be said that little if any weight should be given to the figures at 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 their balance-sheet valuations, that really counts.
12. The book value really measures, therefore, not what the stockholders could get out of their business (its liquidating value), but rather what they have put into the business, including undistributed earnings.
13. It is true that in many individual cases we find companies with small asset values earning large profits, while others with large asset values earn little or nothing. Yet in these cases some attention must be given to the book-value situation. For there is always a possibility that large earnings on the invested capital may attract competition and thus prove temporary; also that large assets, not now earning profits, may later be made more productive, or they may be merged, sold as a whole, or liquidated piecemeal for well above the depressed market level of the stock.
14. BROADLY speaking, the price of common stocks is governed by the prospective earnings and dividends.
15. Thus two common stocks may show the same current earnings per share, may be paying the same dividend rate, and be in equally good financial condition. Yet stock A may be selling at twice the price of stock B, simply because security buyers believe that stock A is going to earn a good deal more than B next year and the years after.
16a. When neither boom nor deep depression is affecting the market, the judgment of the public on individual issues, as indicated by market prices, is usually fairly good. If the market price of some issue appears out of line with the facts and figures available, it will often be found later that the price is discounting future developments not then apparent on the surface. There is, however, a frequent tendency on the part of the stock market to exaggerate the significance of changes in earnings both in a favorable and unfavorable direction. This is manifest in the market as a whole in periods of both boom and depression, and it is also evidenced in the case of individual companies at other times.
16b. At bottom the ability to buy securities—particularly common stocks—successfully is the ability to look ahead accurately. Looking backward, however carefully, will not suffice, and may do more harm than good. Common stock selection is a difficult art, naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future.
17. The investor who buys securities only 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.
September 3, 2014
basic top down dissection of standard financial statements. pretty high-level, not of use to anyone who has taken a financial accounting course. however, hearing this information from the father of value investing can't hurt at all.
March 26, 2020
Graham's book provides an insightful perspective on the basic principles of accounting within a business environment. In the investor lenses, "The interpretation of financial statements" gives valuable and practical lessons for those who want to perceive and understand how a company works in an accounting point of view. The content provided in the book is extremely practical and as helpful as it was in the '30s.
"if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of security analysis."
"if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of security analysis."
March 24, 2018
It's similar to other popular finance books, condensed and worth reading several times.
Although some analysis may be not correct these days. Some personal notes picked up along the way:
1. Each business has a general ledger, which records all financial transactions of its lifetime in form of a chart of accounts (income account, cash account, asset account, ...) following the double-entry accounting method. Each entry (journal entry) has a debit account and a relevant credit account, and total debits must equal total credits (balance). Debits consist of assets, expenses, losses and dividends. Credits consist of liability, revenue, equity, gain and income.
Then a trial balance sheet (internally only), income statement, balance sheet and cash flow statement are produced from the ledger.
2. Each stock or bond has a par value (face value/ original value) when issued. However, it's more important to bonds since interest is evaluated from that. Stocks have zero or very low par value to avoid loss when stock price goes down, its value depends on the market.
3. There are 4 levels of valuation for a business: market value, book value, liquidation value and salvation value. Market value is often higher than book value (net worth calculated from the balance sheet). Liquidation value is the estimated value when the business goes bankruptcy.
4. There is a priority that each kind of security is paid: senior debt (bonds), junior debt (junk bonds), preferred stock and then common stock. Stocks and bonds are graded (investment grade), from AAA to CCC. This grade mostly is more important to bonds, the lower the grade (high risk), the higher the interest.
5. Every business has some Reserves which are set aside from capital surplus (retained earnings) for covering future losses, bad debts or accidents.
6. Capitalization ratios: dissecting the capital structure, which includes debt (current/short-term debt, long-term debt), equity (preferred stocks, common stocks) and capital surplus. Some ratios are: debt-to-equity ratio, bond cap ratio (debt/total capital), current debt to total capital.
7. Some important ratios for analyzing balance sheets and income statements:
- Solvency ratio/Fixed charge coverage ratio:
FCCR = (fIxed cost + EBIT)/(fixed cost + annual interest)
-> It tells how good a business can cover its fixed charges with its profit. This figure is important to banks, lenders to see if a business worths lending money.
-Return on invested capital
ROIC = (net income - dividends) / total capital
-> important number that shows an overview of a business performance, how much it makes with that kind of capital invested.
8. Conclusion: when analyzing a business in general or income statements, balance sheets, ..., the key thing to remember is always making comparison between figures, factors, calculating ratios (so many ratios!, but the important thing is to understand concepts and meanings of those factors (not to remember those ratios) then we can make up our own ratios when we need one) over a long-enough period of time and comparing with other business in the same fields. Only by that, should we properly and fully understand.
Although some analysis may be not correct these days. Some personal notes picked up along the way:
1. Each business has a general ledger, which records all financial transactions of its lifetime in form of a chart of accounts (income account, cash account, asset account, ...) following the double-entry accounting method. Each entry (journal entry) has a debit account and a relevant credit account, and total debits must equal total credits (balance). Debits consist of assets, expenses, losses and dividends. Credits consist of liability, revenue, equity, gain and income.
Then a trial balance sheet (internally only), income statement, balance sheet and cash flow statement are produced from the ledger.
2. Each stock or bond has a par value (face value/ original value) when issued. However, it's more important to bonds since interest is evaluated from that. Stocks have zero or very low par value to avoid loss when stock price goes down, its value depends on the market.
3. There are 4 levels of valuation for a business: market value, book value, liquidation value and salvation value. Market value is often higher than book value (net worth calculated from the balance sheet). Liquidation value is the estimated value when the business goes bankruptcy.
4. There is a priority that each kind of security is paid: senior debt (bonds), junior debt (junk bonds), preferred stock and then common stock. Stocks and bonds are graded (investment grade), from AAA to CCC. This grade mostly is more important to bonds, the lower the grade (high risk), the higher the interest.
5. Every business has some Reserves which are set aside from capital surplus (retained earnings) for covering future losses, bad debts or accidents.
6. Capitalization ratios: dissecting the capital structure, which includes debt (current/short-term debt, long-term debt), equity (preferred stocks, common stocks) and capital surplus. Some ratios are: debt-to-equity ratio, bond cap ratio (debt/total capital), current debt to total capital.
7. Some important ratios for analyzing balance sheets and income statements:
- Solvency ratio/Fixed charge coverage ratio:
FCCR = (fIxed cost + EBIT)/(fixed cost + annual interest)
-> It tells how good a business can cover its fixed charges with its profit. This figure is important to banks, lenders to see if a business worths lending money.
-Return on invested capital
ROIC = (net income - dividends) / total capital
-> important number that shows an overview of a business performance, how much it makes with that kind of capital invested.
8. Conclusion: when analyzing a business in general or income statements, balance sheets, ..., the key thing to remember is always making comparison between figures, factors, calculating ratios (so many ratios!, but the important thing is to understand concepts and meanings of those factors (not to remember those ratios) then we can make up our own ratios when we need one) over a long-enough period of time and comparing with other business in the same fields. Only by that, should we properly and fully understand.
June 12, 2018
A few caveats behind my rating. I was a general manager at a subscription-based software company for years, and I have been recently looking to deepen my knowledge of and facility with accounting principles.
I would not recommend this book as a primer or introduction to financial statements for managers. (I really, really recommend Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean for that.)
I would probably recommend this for investors, or people who already have a reasonable grasp of accounting. He uses quite a few outdated terms, and he obviously doesn't account for software and the Information Age. However, he does take you through, in quite good detail, the various elements of financial statements and (literally) how to interpret them, e.g. where there is fudge room, where there should be alarm bells, etc. and sketches out (what looks like, at least! remember I am a newbie to this!) a reasonable structure for evaluating a company and making sense of it all.
Everyone seems to recommend this book in parallel with Graham's other works, The Intelligent Investor and Security Analysis: Principles and Technique, so I'll probably try to read those at some point in the next year and re-evaluate all three together.
I would not recommend this book as a primer or introduction to financial statements for managers. (I really, really recommend Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean for that.)
I would probably recommend this for investors, or people who already have a reasonable grasp of accounting. He uses quite a few outdated terms, and he obviously doesn't account for software and the Information Age. However, he does take you through, in quite good detail, the various elements of financial statements and (literally) how to interpret them, e.g. where there is fudge room, where there should be alarm bells, etc. and sketches out (what looks like, at least! remember I am a newbie to this!) a reasonable structure for evaluating a company and making sense of it all.
Everyone seems to recommend this book in parallel with Graham's other works, The Intelligent Investor and Security Analysis: Principles and Technique, so I'll probably try to read those at some point in the next year and re-evaluate all three together.
September 24, 2014
A lot has changed since the 1930s. This book is an example of how financial analysis ought to be taught in a concise manner. It's a good book to have around especially for the beginner. A quick read with a fantastic introduction.
September 2, 2017
به درد من که نخورد، یک سال پیش یک کلاس آشنایی با صورت های مالی و ترازنامه تویه کارگزاری مفید (ساختمون اطلس) شرکت کردم ی�� چیزهایی از
حساب داری یاد گرفتم که انگار بنجامین گراهام هم تویه این کتاب بهشون اشاره میکنه
برای خوندن کتاب اینوستر اینتلجنتش هم خیلی تلاش کردم ولی هیچی نفهمیدم ازش، اصلاً بیانش و توضیحاتش رو بدرد بخور نمیبینم، از بنجامین گراهام خیلی تعریف شنیدم ولی تنها چیزهایی که ازش یاد گرفتم تویه دو کتاب زیر بوده نه کتاب معرفش اینوستر اینتلجت
https://www.goodreads.com/book/show/2...
https://www.goodreads.com/book/show/3...
حساب داری یاد گرفتم که انگار بنجامین گراهام هم تویه این کتاب بهشون اشاره میکنه
برای خوندن کتاب اینوستر اینتلجنتش هم خیلی تلاش کردم ولی هیچی نفهمیدم ازش، اصلاً بیانش و توضیحاتش رو بدرد بخور نمیبینم، از بنجامین گراهام خیلی تعریف شنیدم ولی تنها چیزهایی که ازش یاد گرفتم تویه دو کتاب زیر بوده نه کتاب معرفش اینوستر اینتلجت
https://www.goodreads.com/book/show/2...
https://www.goodreads.com/book/show/3...
February 25, 2021
Gave me a better understanding on reading balance sheet, income statement and cashflow statement.
Combining with Warren Buffet's skillset, this book taught me to how to distinguish a well performing compoany such as a Gross Margin of higher than 40%, a 25-50% capital expenditure from net earnings, the high return on net tangible asset, and a low debt that the company can repay within 4 years.
Combining with Warren Buffet's skillset, this book taught me to how to distinguish a well performing compoany such as a Gross Margin of higher than 40%, a 25-50% capital expenditure from net earnings, the high return on net tangible asset, and a low debt that the company can repay within 4 years.
June 22, 2017
It's an extra text to Security Analysis. It helps to understand and apply main concepts.
May 30, 2020
Concise and has a lot of important information. Gives insight into Graham's approach to intelligent investing, but sticks to describing what's most important in financial statements!
February 17, 2020
A Good Supplementary Book For Your Financial Accounting 101 Class.
It's Rather A Simple Book But An Important One To Brush Your Concepts Clear!
It's Rather A Simple Book But An Important One To Brush Your Concepts Clear!
April 23, 2015
It's a book by Graham so it is a must be read. Interesting to see the world from an accountant's perspective from 1937. Which is to say railroads and utilities. That's ok. Still a great little reference book to have on your shelf. Remember, Graham suggests in The Intelligent Investor to make regular investments to mutual funds and to stay away from individual stocks. He suggests if you do plan to not go with the smart money then you need to read books such as this. Then when you've learned your lesson go back to the smart money (mutual funds.)
Honestly probably worth more 3 stars, but it is just a few pages.
Honestly probably worth more 3 stars, but it is just a few pages.
May 1, 2015
At bottom the ability to buy securities-particularly common stocks-successfully is the ability to look
ahead accurately. Looking backward, however carefully, will not suffice, and may do more harm than
good." Ben Graham - The Interpretation of Financial Statements pg. 76
But it is all about looking past record in this book. Good in conjunction with other Graham's book - the intelligent investor.
ahead accurately. Looking backward, however carefully, will not suffice, and may do more harm than
good." Ben Graham - The Interpretation of Financial Statements pg. 76
But it is all about looking past record in this book. Good in conjunction with other Graham's book - the intelligent investor.
July 14, 2008
Take an accounting class then read this book or read it while taking the class or just read it. In any case it will give you an understanding of a company's financial strength if you ever want to know something like that.
June 7, 2012
Best book on accounting I could ever ask for. More information in this quick read than in my entire collegiate financial accounting course.
January 20, 2013
I like this book because of the clarity in the explanation of those financial terms. I guess, those terms are meant to be deceiving and confusing.
June 1, 2015
Good for beginners
December 2, 2015
Good for someone who doesn't understands accounting. The books simplifies accounting principles. You can expect to understand I/S and B/S items.
March 22, 2016
A pretty basic, but nonetheless essential guide to understanding financial statements.
August 20, 2018
A typical way of valuing a business is with the discounted cash flow (DCF) method. Some value investors don't agree with the use of the method due to the need for forecasting uncertain future corporate prospects. Small changes in input values often result in huge swings in the estimated corporate value. Forecasting is deemed futile by investors such as Warren Buffett, Charlie Munger, Bruce Greenwald and James Montier among others. In today's world of competitive disruption there may be alternatives or complements to the DCF method with less dependency on the future that can be used. By studying the current state and the development of the balance sheet and income statement it's possible to understand the health of the business which, in turn, is essential for the firm’s future prospects.
Benjamin Graham, the father of value investing, needs no further introduction. His co-author Spencer B. Meredith was an instructor in security analysis at the New York Stock Exchange Institute together with Graham. In this book written before Graham's more influential books, Security Analysis and The Intelligent Investor, the authors describe how to understand a business and its health by studying the financial statements.
A quote from The Interpretation of Financial Statements concludes the authors’ view on forecasting: "Of course, the success of an investment depends ultimately upon future developments, and the future may never be forecast with accuracy. But if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of security analysis."
The Interpretation of Financial Statements is written for those who want to understand the language of business that consists of the financial statements. In the book, the authors describe the most important constituents of balance sheets and income statements one-by-one. The text is structured in three parts. The first part introduces the reader to balance sheets and income statements. Each chapter covers one piece of a financial statement. The authors explain the item and its significance which is essential to know for the security analyst. They also describe different key ratios that are of practical use in order to distinguish if the business is in a favorable condition or in bad shape. In the second part the authors present different financial ratios while the third part is a description of financial terms and phrases.
This is a book for those who would like to understand concepts such as earnings power and book value, which is of essence in the fundamental analysis of a company. By only considering the qualitative aspects of a business the investor is at risk of missing important details that are necessary in order to set a reasonable intrinsic value range. In order to get further guidance on how to use the knowledge in practice, Graham’s Security Analysis is a great place for further study.
If I were to mention anything negative about the book it would be that the examples drawn are from a different time, meaning that they are typically limited to industrials, railroads and utilities. This is of course no criticism of the authors as the mix of listed companies was truly different in 1937. However, it's important to convert the reasoning and language to a broader set of modern businesses. Even more importantly, the financial statements were arguably more easily structured and read in the first half of the 20th century compared to today's often complex reports. This is also commented upon in the introduction.
I would like to conclude with a timeless statement from the book that summarizes the difficult challenge all investors face: "Common stock selection is a difficult art - naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future."
Benjamin Graham, the father of value investing, needs no further introduction. His co-author Spencer B. Meredith was an instructor in security analysis at the New York Stock Exchange Institute together with Graham. In this book written before Graham's more influential books, Security Analysis and The Intelligent Investor, the authors describe how to understand a business and its health by studying the financial statements.
A quote from The Interpretation of Financial Statements concludes the authors’ view on forecasting: "Of course, the success of an investment depends ultimately upon future developments, and the future may never be forecast with accuracy. But if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of security analysis."
The Interpretation of Financial Statements is written for those who want to understand the language of business that consists of the financial statements. In the book, the authors describe the most important constituents of balance sheets and income statements one-by-one. The text is structured in three parts. The first part introduces the reader to balance sheets and income statements. Each chapter covers one piece of a financial statement. The authors explain the item and its significance which is essential to know for the security analyst. They also describe different key ratios that are of practical use in order to distinguish if the business is in a favorable condition or in bad shape. In the second part the authors present different financial ratios while the third part is a description of financial terms and phrases.
This is a book for those who would like to understand concepts such as earnings power and book value, which is of essence in the fundamental analysis of a company. By only considering the qualitative aspects of a business the investor is at risk of missing important details that are necessary in order to set a reasonable intrinsic value range. In order to get further guidance on how to use the knowledge in practice, Graham’s Security Analysis is a great place for further study.
If I were to mention anything negative about the book it would be that the examples drawn are from a different time, meaning that they are typically limited to industrials, railroads and utilities. This is of course no criticism of the authors as the mix of listed companies was truly different in 1937. However, it's important to convert the reasoning and language to a broader set of modern businesses. Even more importantly, the financial statements were arguably more easily structured and read in the first half of the 20th century compared to today's often complex reports. This is also commented upon in the introduction.
I would like to conclude with a timeless statement from the book that summarizes the difficult challenge all investors face: "Common stock selection is a difficult art - naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future."
August 9, 2020
A one-time read. For an accounting professional, there is nothing new in store over here.
Key points:
• Property, plant and equipment – not to be taken too seriously; companies might place arbitrary values when PPE is accounted for under the Revaluation Model; epithet “Watered stock”. United States steel corporation had inflated capitalization value by $ 600 Million
• Ledger is the document in which accounts are kept
• Intangible assets – little or no weight should be given to this caption. One of the many contradictions of corporate accounting – Goodwill is written-off WHEN THE POSITION OF THE COMPANY IMPROVES. Example – FW Woolworth had a 50 Million dollar goodwill initially. Eventually, it wrote it down to 1$. But, in fact, market felt that the goodwill at this time was 30 million dollar.
• Prepaid expenses – gives little information, except that it indicates how a company’s business is being conducted
• Working capital – involves 2 important factors
o Excess of Current Assets over Current Liabilities – known as Net Current Assets or Working Capital
o Ratio of CA to CL – known as Current Ratio
• The proper amount of working capital required will depend on amount & character of the business. 1 point of comparison is the Amount of Working Capital per Dollar of Sales
• Current ratio – in industrial companies, 2:1 is a standard minimum. But, in listed companies, this ratio tends to be more.
• Inventory –
o Inventory turnover ratio
o Inventory to total current assets, if turnover is not readily available
• Receivables – just like inventory, calculate & analyse Debtors Turnover
• Reserves – it’s useful to divide them into 3 classes
o Representing a liability (litigation etc.)
o Part of surplus (retained earnings)
o Offset against some asset (Accumulated Depreciation, Doubtful Debts Allowance, allowance for Obsolescence of inventory)
• Net book value (net tangible asset value) = net tangible assets (exclude intangibles like goodwill). If we had to calculate “BOOK VALUE”, then no need to excluded intangibles
• Book value of bonds and stocks
o NBV of Bonds – Add Bonds + Preferred Stock + Common Stock + Surplus - Goodwill
o NBV of Preferred Stock - Preferred Stock + Common Stock + Surplus - Goodwill
o NBV of Common Stock – LIQUIDATING VALUE OF Preferred Stock – value of net tangible assets applicable to the preferred stock
• Liquidating Value = Net Current Assets (aka Working Capital) – full claims of all senior securities
• Interest coverage ratio – if you are calculating coverage for preferred stock (& company already has bonds outstanding), then compute it as Total of Finance costs of bond + Preferred Dividend
• Studying the Profit & Loss Account
o Operating ratio – operating expenses to sales- indicates how much company can absorb if volume or sales price declines
o Ratio of fixed charges (finance cost – bonds, preferred stock)
o Depreciation
• Apart from internal factors like financials, analyze the external forces like industry, economic climate,
• Ratios
o Margin of profit = Operating income/ sales. Indicates company has this % left after paying all cost of operations
o Earnings on invested capital – total income available for interest charges/ bonds, stocks & surplus
o Interest coverage ratio = EBIT/ interest
o Interest coverage ratio (considering preferred dividend) = EBIT/ interest + Preferred dividend
o EPS
o Depreciation as a % of PPE = depreciation/ cost of plant (NBV can alternatively be taken)
o Depreciation as a % of sales
o Net income transferred to reserves as a % to net income available for dividends
o Inventory turnover
o Debtors turnover
o Current ratio
o Quick ratio
o Book value of common stock
o PE Ratio
Key points:
• Property, plant and equipment – not to be taken too seriously; companies might place arbitrary values when PPE is accounted for under the Revaluation Model; epithet “Watered stock”. United States steel corporation had inflated capitalization value by $ 600 Million
• Ledger is the document in which accounts are kept
• Intangible assets – little or no weight should be given to this caption. One of the many contradictions of corporate accounting – Goodwill is written-off WHEN THE POSITION OF THE COMPANY IMPROVES. Example – FW Woolworth had a 50 Million dollar goodwill initially. Eventually, it wrote it down to 1$. But, in fact, market felt that the goodwill at this time was 30 million dollar.
• Prepaid expenses – gives little information, except that it indicates how a company’s business is being conducted
• Working capital – involves 2 important factors
o Excess of Current Assets over Current Liabilities – known as Net Current Assets or Working Capital
o Ratio of CA to CL – known as Current Ratio
• The proper amount of working capital required will depend on amount & character of the business. 1 point of comparison is the Amount of Working Capital per Dollar of Sales
• Current ratio – in industrial companies, 2:1 is a standard minimum. But, in listed companies, this ratio tends to be more.
• Inventory –
o Inventory turnover ratio
o Inventory to total current assets, if turnover is not readily available
• Receivables – just like inventory, calculate & analyse Debtors Turnover
• Reserves – it’s useful to divide them into 3 classes
o Representing a liability (litigation etc.)
o Part of surplus (retained earnings)
o Offset against some asset (Accumulated Depreciation, Doubtful Debts Allowance, allowance for Obsolescence of inventory)
• Net book value (net tangible asset value) = net tangible assets (exclude intangibles like goodwill). If we had to calculate “BOOK VALUE”, then no need to excluded intangibles
• Book value of bonds and stocks
o NBV of Bonds – Add Bonds + Preferred Stock + Common Stock + Surplus - Goodwill
o NBV of Preferred Stock - Preferred Stock + Common Stock + Surplus - Goodwill
o NBV of Common Stock – LIQUIDATING VALUE OF Preferred Stock – value of net tangible assets applicable to the preferred stock
• Liquidating Value = Net Current Assets (aka Working Capital) – full claims of all senior securities
• Interest coverage ratio – if you are calculating coverage for preferred stock (& company already has bonds outstanding), then compute it as Total of Finance costs of bond + Preferred Dividend
• Studying the Profit & Loss Account
o Operating ratio – operating expenses to sales- indicates how much company can absorb if volume or sales price declines
o Ratio of fixed charges (finance cost – bonds, preferred stock)
o Depreciation
• Apart from internal factors like financials, analyze the external forces like industry, economic climate,
• Ratios
o Margin of profit = Operating income/ sales. Indicates company has this % left after paying all cost of operations
o Earnings on invested capital – total income available for interest charges/ bonds, stocks & surplus
o Interest coverage ratio = EBIT/ interest
o Interest coverage ratio (considering preferred dividend) = EBIT/ interest + Preferred dividend
o EPS
o Depreciation as a % of PPE = depreciation/ cost of plant (NBV can alternatively be taken)
o Depreciation as a % of sales
o Net income transferred to reserves as a % to net income available for dividends
o Inventory turnover
o Debtors turnover
o Current ratio
o Quick ratio
o Book value of common stock
o PE Ratio
July 30, 2017
I have no academic business background whatsoever, but I found this book when I read Graham's 'The Intelligent Investor'. I absolutely loved 'The Intelligent Investor' and figured that this book would be worthwhile. I read this book so that I could learn how to read financial statements, it seems like that is a prerequisite to fully understanding the 'The Intelligent Investor' and another book I want to ready by Graham, 'Security Analysis'.
At first, I tried to study this book but I quickly realized that it is probably better suited as a reference book because I found more that I do not know. Instead of focusing intently on the various unfamiliar accounting terms, I read through the entire book, made notes, and will refer to it as I go through an actual 10-K.
I feel like 'The Intelligent Investor' sent me on a path backwards toward understanding because after reading this book, I think I need to take a few accounting classes to fully understand the information in Graham's books. If anyone reading this knows of a worthwhile self-study accounting curriculum, please let me know.
At first, I tried to study this book but I quickly realized that it is probably better suited as a reference book because I found more that I do not know. Instead of focusing intently on the various unfamiliar accounting terms, I read through the entire book, made notes, and will refer to it as I go through an actual 10-K.
I feel like 'The Intelligent Investor' sent me on a path backwards toward understanding because after reading this book, I think I need to take a few accounting classes to fully understand the information in Graham's books. If anyone reading this knows of a worthwhile self-study accounting curriculum, please let me know.
July 21, 2020
Ben Graham is known as the father of “value,” investing, and this small treatise (or reference guide, really) is the value investor’s toolbox. Ben systematically breaks down the different components of the balance sheet (debuts and credits must equal out, hence the term “balance”) and gives small pieces of insight about each component, it’s significance, both individually and in the context of an industry, and how the component fits into the bigger picture of arriving at an accurate snapshot of a company (a balance sheet is only accurate for a snapshot in time, generally one date, which will be listed). I will reference this guide and can see myself reading it over and over, since it is concise and can practically fit into a pocket. This is the most underrated introduction to financial statement analysis that I’ve ever encountered and I will use it for reference as I work my way through, “Security Analysis,” and a re-read of “The Intelligent Investor,” both of which are also by Ben Graham!
November 27, 2022
This book can be best characterised as a great reference book for historical financial analysis, whether the analytical purpose is for security analysis or any other purposes involving fundamental company financial analysis. It primarily focuses on balance sheet and income statement line items and how to interpret those accounts but also introduces important guiding principles and concepts related to making sound investment decisions. Some accounting rules existed at the time of the writing are obsolete and are not applicable to today’s GAAP or IFRS standards (e.g., pooling vs. purchase) but just being aware of different accounting standards that had existed in the past gives additional insights into how today’s standards have evolved. Overall, this book is a great reference to conducting financial statement analysis and interpreting a company’s accounts. It should be read in conjunction with The Intelligent Investor and Security Analysis, other classic books written by Benjamin Graham.
May 22, 2017
Graham goes on to explain the various terms in the balance sheet and income statement of a company (cash flow statement was not released by the company in his time), gives his analysis and cases where he illustrates what sorts of ratios look good in what sectors (in his time, of course) and how should one adequately ensure the bond is of a superior quality and how the preferred and common stocks give results.
It is basically an overview of accounting with respect to financial securities. One of the important aspects for me was the realization of different parts of reserves and that surplus is the only one for investors. Margin ratios were important and I had given too much importance to book value of the share in my prior investments which was not bad though but needed improvement!
It is basically an overview of accounting with respect to financial securities. One of the important aspects for me was the realization of different parts of reserves and that surplus is the only one for investors. Margin ratios were important and I had given too much importance to book value of the share in my prior investments which was not bad though but needed improvement!
February 9, 2020
The book is spectacularly concise and effective. Beyond containing what you need to know to get from nothing to a perfectly sufficient understanding of financial statements, the book mentions 2 very important caveats (the inaccuracy of goodwill impairments and the dangers of growing accruals). The book is inherently limited in scope, saying very nothing very important subjects like the finding stocks or knowing what makes for a good company, but I don't think there could ever be a more efficient way of learning how to research companies based off their financial statements.
January 27, 2021
A simple interpretation of financial concepts and how they're used in the financial statements.
I think Ben's way of writing is not too easy to read, and some examples are from old industries. Overall, it gives a nice overview of what the financial statement and its components look like and how to read it.
I'd suggest finding an online course instead of reading this, even though it's quite a short read.
I think Ben's way of writing is not too easy to read, and some examples are from old industries. Overall, it gives a nice overview of what the financial statement and its components look like and how to read it.
I'd suggest finding an online course instead of reading this, even though it's quite a short read.
March 10, 2023
Good short book from the original value investor, Benjamin Graham. Some outdated material, but it teaches you to be overall cautious of the trickery in accounting that can take place, and what numbers to truly take to heart. If you want to learn how to read financial statements, I wouldn't suggest this book. This is after knowing how to read a financial statement and now looking to find which lines bring the greatest value when making an investment decision.
November 27, 2018
Quick but excellent overview of the various components of company financial statements. Graham also teaches how to calculate some important financial ratios and how to interpret them compared to the companies past and the other companies in its industry. Little advice is offered on how to use these metrics to value securities.
November 23, 2020
A short wiki-style book about the definition, purpose, and how to read the balance sheet and the part of the income statement.
The cons of this book is it using very old, hence not relatable, examples and language.
In my opinion, readers can obtain the same set of knowledge using a more modern book or short course, the genius of Graham is not benefiting this book at all IMO.
The cons of this book is it using very old, hence not relatable, examples and language.
In my opinion, readers can obtain the same set of knowledge using a more modern book or short course, the genius of Graham is not benefiting this book at all IMO.
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