Book Review-Financial Statement Analysis and Security Valuation


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, 5 e 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.

Focus on Active Investing: The analysis in this book is a tool for the investor who wishes to challenge the market price and to understand how the market price reflects value.

The approach is from the point of view of the active investor.

Handling Risk Investing: The reverse engineering approach places the emphasis on the expected return to investing at the current market price rather than a determination of the cost of capital.

The financial statement analysis is designed to challenge the forecasts extracted from the market price, particularly growth forecasts.


Financial Statement Analysis and Security Valuation

Concise Presentation on Valuation: Valuation models are used appropriately, finessing the reliance on an assumed cost of capital and growth rate and used to understand the forecasts implicit in market prices.

Emphasis on Beware of Buying Growth: Growth is risky, and it is easy to overpay for growth. This text addresses minimizing the risk of paying too much for growth.

New and Relevant Updates: Material in all chapters has been updated to incorporate new accounting standards.

Examples, cases, illustrations and graphical material have been updated and are current through 2010. Comparisons between U.S. GAAP accounting and international (IFRS) accounting are made more relevant. New end-of-chapter exercises and cases have been added.

Forecasting & Valuation Simplified: Chapter 15 on simple forecasting and valuation has been extensively revised and simplified.

Financial Statement Analysis and Security Valuation

Retained Features

Conceptual Framework: This book continues to work from a conceptual framework that helps the student understand how businesses work, how they generate value, and how the value they generate is captured in financial statements.

Comprehensive end-of-chapter material: Exercises apply methods covered in the chapter and are divided into Drill Exercises and Applications.

Drill Exercises are simple and straightforward, and serve to ease the student into the material, while Applications help students to apply a concept they?re learning to real business practice.

Other EOC material includes concept question that reinforce the thinking in the chapter and mini-cases which are designed for classroom discussion.

These exercises use real-world companies to make different points in different parts of the book.
Module sections of the text: Each text part is a distinct module, allowing the parts to be taught out of order without inconveniencing the instructor.

Pedagogical features: Pedagogical features include chapter-opening flow charts, the Analyst’s Checklist, and the Analyst’s Toolkit.

The Web Connection box at the end of each chapter directs students to features on the web page for that chapter, including accounting material. Select end-of-chapter exercises incorporate the Building Your Own Analysis valuation tool on the website.

About the Author

Stephen Penman is the George O. May Professor and the Morgan Stanley Research Scholar in the Graduate School of Business, Columbia University.

He also serves as co-director of Columbia’s Center for Excellence in Accounting and Security Analysis. Prior to his appointment at Columbia in 1999, Stephen Penman was the L.H. Penny Professor in the Walter A. Haas School of Business at the University of California at Berkeley.

From 1990-95 he served a Chairman of the Professional Accounting Program and Chairman of the Accounting Faculty at Berkeley.

Financial Statement Analysis and Security Valuation

He also initiated and chaired Berkeley’s Annual Conference on Financial Reporting. He has served as a Visiting Professor at Columbia University and the London Business School of Economic.

Professor Penman received a first-class honors degree in Commerce from the University of Queensland, Australia, and M.B.A. and Ph.D. degrees from the University of Chicago. His research is concerned with the valuation of equity and the role of accounting information in security analysis.

He has published widely in finance and accounting journals and has conducted seminars on fundamental analysis and equity evaluation for academic and professional audience.

In 1991 he was awarded the Notable Contribution to Accounting Literature Award by the American Accounting Association and the American Institute of Certified Public Accountants, and in 2002 he was awarded the American Accounting Association and Deloitte & Touche Wildman Medal for his book, Financial Statement Analysis and Security Valuation, published by McGraw-Hill/Irwin.

He is managing editor of the Review of Accounting Studies and is on the editorial board of the Schmalenbach Business Review.

© 2016