Includes index.

Machine generated contents note: ch. 1 Introduction to Investing and Valuation Investment Styles and Fundamental Analysis
Bubble, Bubble, Toil, and Trouble How Bubbles Work
Analysts During the Bubble More Toil and Trouble
Fundamental Analysis Anchors Investors The Setting: Investors, Firms, Securities, and Capital Markets The Business of Analysis: The Professional Analyst Investing in Firms: The Outside Analyst
Investing Within Firms: The Inside Analyst
The Analysis of Business Strategy and Valuation
Mastering the Details The Key Question: Sustainability of Competitive Advantage Financial Statements: The Lens on the Business
Choosing a Valuation Technology Guiding Principles
Anchoring Value on the Financial Statements
How to Use This Book An Outline of the Book
The Web Connection Key Concepts A Continuing Case: Kimberly-Clark Corporation Concept Questions Exercises Minicase
Contents note continued: ch. 2 Introduction to the Financial Statements
The Analyst's Checklist The Form of the Financial Statements
Introducing Nike, Inc. The Balance Sheet The Income Statement
The Cash Flow Statement The Statement of Shareholders' Equity
The Footnotes and Supplementary Information to Financial Statements
The Articulation of the Financial Statements: How the Statements Tell a Story
Measurement in the Financial Statements
The Price-to-Book Ratio Measurement in the Balance Sheet
Analysis in the Income Statement The Price-Earnings Ratio
Accounting as an Anchor: Don't Mix What You Know with Speculation
The tension in Accounting Accounting Quality
Summary
The Analyst's Toolkit
Pt. ONE FINANCIAL statement AND VALUATION
Ch. 3 How Financial Statements AreUsed in Valuation
Contents note continued: The Analyst's Checklist
Multiple Analysis
The Method of Comparables
Screening on Multiples
Asset-Based Valuation
Fundamental Analysis
The Process of Fundamental Analysis
Financial Statement Analysis, Pro Forma Analysis, and Fundamental Analysis
The Architecture of Fundamental Analysis: The Valuation Model
Terminal Investments and Going-Concern Investments
Valuation Models for Terminal Investments
Valuation Models for Going-Concern Investments
Criteria for a Practical Valuation Model
What Generates Value?
Valuation Models, the Required Return, and Asset Pricing Models
Mini cases
Appendix The Required Return and Asset Pricing Models
ch. 4 Cash Accounting, Accrual Accounting, and Discounted Cash Flow Valuation
Contents note continued: The Dividend Discount Model
The Discounted Cash Flow Model
Free Cash Flow and Value Added
The Statement of Cash Flows
The Cash Flow Statement under IFRS
Forecasting Free Cash Flows
Cash Flow, Earnings, and Accrual Accounting
Earnings and Cash Flows
Accruals, Investments, and the Balance Sheet
ch. 5 Accrual Accounting and Valuation: Pricing Book Values
The Concept Behind the Price-to-Book Ratio
Beware of Paying Too Much for Earnings
Prototype Valuations
Valuing a Project
Valuing a Savings Account
The Normal Price-to-Book Ratio
A Model for Anchoring Value on Book Value
Residual Earnings Drivers and Value Creation
A Simple Demonstration and a Simple Valuation Model
Applying the Model to Equities
Contents note continued: The Forecast Horizon and the Continuing Value Calculation
Beware of Paying Too Much for Growth
Converting Analysts Forecasts to a Valuation
Build YouOwn Valuation Engine
Applying the Model to Projects and Strategies
Features of the Residual Earnings Valuation
Book Value Captures Value, and Residual Earnings Captures Value Added to Book Value
Protection from Paying Too Much for Earnings Generated by Investment
Protection from Paying Too Much for Earnings Created by the Accounting
Capturing Value Not on the Balance Sheet for All Accounting Methods
Residual Earnings Are Not Affected by Dividends, Share Issues, or Share Repurchases
What the Residual Earnings Model Misses
ch. 6 Accrual Accounting and Valuation: Pricing Earnings
Contents note continued: The Concept Behind the Price-Earnings Ratio
Beware of Paying Too Much for Earnings Growth
From Price-to-Book Valuation to P/E Valuation
Prototype Valuation
The Normal Forward P/E Ratio
The Normal Trailing P/​E Ratio
A Poor P/​E Model
A Model for Anchoring Value on Earnings
Measuring Abnormal Earnings Growth
Anchoring Valuation on Current Earnings
Converting Analysts' Forecasts to a Valuation
Features of the Abnormal Earnings Growth Model
Buy Earnings
Abnormal Earnings Growth Valuation and Residual Earnings Valuation
Abnormal Earnings Growth Is Not Affected by Dividends, Share Issues, or Share Repurchases
Accounting Methods and Valuation
The Fed Model
PEG Ratios
Contents note continued: Concept Questions
Ch. 7 Valuation and Active Investing
How the Fundamental Investor Operates
Common Misconceptions About Valuation
Applying Fundamental Principles
Challenging Speculation in the Market Price
Reverse Engineering the S&​P 500
Challenging the Price of a Stock
Reverse Engineering with the Abnormal Earnings Growth Model
Build Your Own Active Investing Tool
Pt. TWO THE ANALYSIS OF FINANCIAL STATEMENTS
ch. 8 Viewing the Business Through the Financial Statements
Business Activities: The Cash Flows
The Reformulated Cash Flow Statement
The Reformulated Balance Sheet
Business Activities: All Stocks and Flows
The Reformulated Income Statement
Contents note continued: Accounting Relations That Govern Reformulated Statements
The Sources of Free Cash Flow and the Disposition of Free Cash Flow
The Drivers of Dividends
The Drivers of Net Operating Assets and Net Indebtedness
Tying It Together for Shareholders: What Generates Value?
Build Your Analysis Engine
ch. 9 The Analysis of the Statement of Shareholders' Equity
Reformulating the Statement of Owners' Equity
Running with Nike
Reformulation Procedures
Dirty-Surplus Accounting
Comprehensive Income Reporting Under U.S. GAAP and IFRS
Ratio Analysis
Payout and Retention Ratios
Shareholder Profitability
Growth Ratios
Hidden Dirty Surplus
Issue of Shares in Operations
Issue of Shares in Financing Activities
Contents note continued: Handling Diluted Earnings per Share
Share Transactions in Inefficient Markets
The Eye of the Shareholder
Accounting Quality Watch
ch. 10 The Analysis of the Balance Sheet and Income Statement
Reformulation of the Balance Sheet
Issues in Reformulating Balance Sheets
Strategic Balance Sheets
Reformulation of the Income Statement
Tax Allocation
Issues in Reformulating Income Statements
Value Added to Strategic Balance Sheets
Residual Income from Operations
Comparative Analysis of the Balance Sheet and Income Statement
Common-Size Analysis
Trend Analysis
Contents note continued: A Continuing Case: Kimberly-Clark Corporation
Ch. 11 The Analysis of the Cash Flow Statement
The Calculation of Free Cash Flow
GAAP Statement of Cash Flows and Reformulated Cash Flow Statements
Reclassifying Cash Transactions
Tying It Together
Cash Flow from Operations
Ch. 12 The Analysis of Profitability
The Analysis of Return on Common Equity
First-Level Breakdown: Distinguishing Financing and Operating Activities and the Effect of Leverage
Financial Leverage
Operating Liability Leverage
Summing Financial Leverage and Operating Liability Leverage Effects on Shareholder Profitability
Return on Net Operating Assets and Return on Assets
Contents note continued: Financial Leverage and Debt-to-Equity Ratios
Second-Level Breakdown: Drivers of Operating Profitability
Third-Level Breakdown
Profit Margin Drivers
Turnover Drivers
Key Drivers
Borrowing Cost Drivers
Build You Own Analysis Engine
ch. 13 The Analysis of Growth and Sustainable Earnings
What Is Growth?
Warnings About Growth
Cutting to the Core: Sustainable Earnings
Core Operating Income
Issues in Identifying Core Operating Income
Core Operating Profitability
Core Borrowing Cost
Analysis of Growth
Growth Through Profitability
Operating Leverage
Analysis of Changes in Financing
Analysis of Growth in Shareholders' Equity
Growth, Sustainable Earnings, and the Evaluation of P/​B Ratios and P/​E Ratios
Contents note continued: How Price-to-Book Ratios and Trailing P/​E Ratios Articulate
Trailing Price-Earnings Ratios and Transitory Earnings
P/​E Ratios and the Analysis of Sustainable Earnings
Price-to-Book and Growth
Pt. THREE FORECASTING AND VALUATION ANALYSIS
ch. 14 The Value of Operations and the Evaluation of Enterprise Price-to-Book Ratios and Price-Earnings Ratios
A Modification to Residual Earnings Forecasting: Residual Operating Income
The Drivers of Residual Operating Income
A Modification to Abnormal Earnings Growth Forecasting: Abnormal Growth in Operating Income
Abnormal Growth in Operating Income and the "Dividend" from Operating Activities
Eye on the Future: Sustainable Income
The Cost of Capital and Valuation
Contents note continued: The Cost of Capital for Operations
The Cost of Capital for Debt
Operating Risk, Financing Risk, and the Cost of Equity Capital
Financing Risk and Return and the Valuation of Equity
Leverage and Residual Earnings Valuation
Leverage and Abnormal Earnings Growth Valuation
Leverage Creates Earnings Growth
Debt and Taxes
Mark-to-Market Accounting: A Tool for Incorporating the Liability for Stock Options in Valuation
Enterprise Multiples
Enterprise Price-to-Book Ratios
Enterprise Price-Earnings Ratios
ch. 15 Anchoring on the Financial Statements: Simple Forecasting and Simple Valuation
Simple Forecasts and Simple Valuations
Introducing PPE, Inc.
The No-Growth Forecast and Valuation
The Growth Forecast and Valuation
Contents note continued: Simple Forecasting: Adding information to Financial Statement Information
Weighed-Average Forecasts of Growth
Simple Valuations with Short-Term and Long-Term Growth Rates
Growth in Sales as a Simple Forecast of Growth
Information in Analysts' Forecasts
Simple Valuation as an Analysis Tool
Sensitivity Analysis
Reverse Engineering to Challenge the Market Price
Ch. 16 Full-Information Forecasting, Valuation, and Business Strategy Analysis
Financial Statement Analysis: Focusing the Lens on the Business
1.Focus on Residual Operating Income and Its Drivers
2.Focus on Change
3.Focus on Key Drivers
4.Focus on Choices Versus Conditions
Full-Information Forecasting and Pro Forma Analysis
A Forecasting Template
Contents note continued: Features of Accounting-Based Valuation
Value Generated in Share Transactions
Mergers and Acquisitions
Share Repurchases and Buyouts
Financial Statement Indicators and Red Flags
Business Strategy Analysis and Pro Forma Analysis
Unarticulated Strategy
Scenario Analysis
Pt. FOUR ACCOUNTING ANALYSIS AND VALUATION
Ch. 17 Creating Accounting Value and Economic Value
Value Creation and the Creation of Residual Earnings
Accounting Methods, Price-to-Book Ratios, Price-Earnings Ratios, and the Valuation of Going Concerns
Accounting Methods with a Constant Level of Investment
Accounting Methods with a Changing Level of Investment
An Exception: LIFO Accounting
Hidden Reserves and the Creation of Earnings
Contents note continued: Conservative and Liberal Accounting in Practice
LIFO Versus FIFO
Research and Development in the Pharmaceuticals Industry
Expensing Goodwill and Research and Development Expenditures
Liberal Accounting: Breweries and Hotels
Profitability in the 1990s
Economic-Value-Added Measures
Accounting Methods and the Forecast Horizon
The Quality of Cash Accounting and Discounted Cash Flow Analysis
Growth, Risk, and Valuation
Ch. 18 Analysis of the Quality of Financial Statements
What Is Accounting Quality?
Five Questions About Accounting Quality
Cutting Through Accounting: Detecting Income Shifting
Separating What We Know from Speculation
Prelude to a Quality Analysis
Quality Diagnostics
Diagnostics to Detect Manipulated Sales
Contents note continued: Diagnostics to Detect Manipulation of Core Expenses
Diagnostics to Detect Manipulation of Unusual Items
Detecting Transaction Manipulation
Core Revenue Timing
Core Revenue Structuring
Core Expense Timing
Releasing Hidden Reserves
Other Core Income Timing
Unusual Income Timing
Organisational Manipulation: Off-BalanceSheet Operations
Justifiable Manipulation?
Disclosure Quality
Quality Scoring
Abnormal Returns to Quality Analysis
Pt. FIVE THE ANALYSIS OF RISK AND RETURN
Ch. 19 The Analysis of Equity Risk and Return for Active Investing
The Required Return and the Expected Return
The Nature of Risk
The Distribution of Returns
Diversification and Risk
Asset Pricing Models
Fundamental Risk
A risk to the Return on Common Equity
Growth Risk
Contents note continued: Value-at-Risk Profiling
Adaptation Options and Growth Options
Strategy and Risk
Discounting for Risk
Price Risk
Market Inefficiency Risk
Liquidity Risk
Inferring Expected Returns for Active Investing
Growth-Return Profiles
Finessing the Required Return Problem
Evaluating Implied Expected Returns with Value-at-Risk Profiles
Investing Within Risk Classes
Beware of Paying for Risky Growth
Expected Returns in Uncertain Times
Ch. 20 The Analysis of Credit Risk and Return
The Suppliers of Credit
Financial Statement Analysis for Credit Evaluation
Reformulated Financial Statements
Short-Term Liquidity Ratios
Long-Term Solvency Ratios
Operating Ratios
Forecasting and Credit Analysis
Prelude to Forecasting: The Interpretive Background
Contents note continued: Ratio Analysis and Credit-Scoring
Full-Information Forecasting
Required Return, Expected Return, and Active Debt Investing
Active Bond Investing
Liquidity Planning and Financial Strategy
Appendix
A Summary of Formulas.

Valuation is at the heart of investing. A considerable part of the information for valuation is in the financial statements. "Financial Statement Analysis and Security Valuation" by Stephen Penman shows students how to extract information from financial statements and use that data to value firms. The 5th edition shows how to handle the accounting in financial statements and use the financial statements as a lens to view a business and assess the value it generates.

FIN924 FIN324