Financial Statement Analysis - New York University
Financial Statement Analysis!
"The raw data for investing"
Aswath Damodaran!
1!
Questions we would like answered...!
Assets
What are the assets in place? How valuable are these assets? Assets in Place How risky are these assets?
What are the growth assets? Growth Assets How valuable are these assets?
Liabilities
What is the value of the debt?
Debt
How risky is the debt?
Equity What is the value of the equity? How risky is the equity?
Aswath Damodaran!
2!
Basic Financial Statements!
The balance sheet, which summarizes what a firm owns and owes at a point in time.
The income statement, which reports on how much a firm earned in the period of analysis
The statement of cash flows, which reports on cash inflows and outflows to the firm during the period of analysis
Aswath Damodaran!
3!
The Accounting Balance Sheet!
Figure 4.1: The Balance Sheet
Assets
Liabilities
Long Lived Real Assets Short-lived Assets
Fixed Assets Current Assets
Current Liabilties
Debt
Short-term liabilities of the firm Debt obligations of firm
Investments in securities & assets of other firms
Assets which are not physical, like patents & trademarks
Financial Investments Intangible Assets
Other Liabilities
Equity
Other long-term obligations Equity investment in firm
Aswath Damodaran!
4!
Principles underlying accounting balance sheets!
An Abiding Belief in Book Value as the Best Estimate of Value: Unless a substantial reason is given to do otherwise, accountants view the historical cost as the best estimate of the value of an asset.
A Distrust of Market or Estimated Value: The market price of an asset is often viewed as both much too volatile and too easily manipulated to be used as an estimate of value for an asset. This suspicion runs even deeper when values are is estimated for an asset based upon expected future cash flows.
A Preference for under estimating value rather than over estimating it: When there is more than one approach to valuing an asset, accounting convention takes the view that the more conservative (lower) estimate of value should be used rather than the less conservative (higher) estimate of value.
Aswath Damodaran!
5!
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