Financial Statement Analysis and Security Valuation

This book surely is the best in fundamental analysis. A didatic approach with good balance between theory and practice and good suplementary material.

For decades Graham and Dodd's "Security Analysis" has been the Bible of Value Investing. But now Stephen Penman, Columbia professor who teaches what Graham did, stakes his claim as a truly worthy successor, with this textbook. I felt a profound expansion of my understanding of fundamental analysis when I read Security Analysis. Penman's textbook is the only other book that has provided me with a similar deepening of my understanding. Indeed, if Graham were still around, I am quite sure this is the book he would have written. If you seek a strong foundation and understanding of how accounting information and valuation work together, there is no better book i have come across. All the other texts seem to pale in comparison. Here's a small extract: "A valuation model not only tells you how to think about the value generation in the future, but it also tells you how to account for the value generation. A valuation model is really a model of proforma accounting for the future. Should you account for the future in terms of dividends? should you account for the future in terms of cash flows? Or should you use accrual accounting for the future? You see, then, that accounting and valuation are very much alike. Valuation is a matter of accounting for value." Statements like these will give a dedicated value investor a high. If you are one, make sure u read this book!

I must first disclose that I am a student in Professor Penman's class at Columbia, therefore I may have some insights and access to items that other readers may not have. Nonetheless, this textbook is amazing! I am in my last 2 electives before graduating from a dual MBA program at Columbia/LBS, and this textbook and class are "pulling everything together." I have taken 5 finance courses and 3 accounting classes and thus, have a pretty good background in finance/accounting, despite being a physician with no practical experience in the financial services industry (yet). THE BOOK: What I have found different about this text book and every other finance/valuation textbook I have used in my studies including Brealey and Myers (the finance bible)is that it handles both the broad, conceptual aspects and the nuts-and-bolts valuation tools extremely well. Penman is able to start with a broad concept and then introduce valuation tools/techniques that build on these concepts. This makes it easier to understand and remember the valuation process (at least for me). The graphs and diagrams are equally helpful (for a change) and re-enforce the textual information. In contrast, the McKinsey valuation textbook (bible #2) is good on the conceptual aspects, but lacks tremendously in the detailed analysis sections. The additional workbook for the McKinsey book fails miserably as well. This textbook has it all, and provides an excellent framework and tool set to enter the financial services industry.

Penman's book is rapidly becoming THE textbook for MBA courses in fundamental analysis and equity valuation, and rightly so. The approach he suggests just plain makes good economic sense, and he is able to offer a method that allows the users of financial statements to get to the core of how economic profits are created, and perhaps most importantly, how those profits should be valued. In the end, of course, no one has all of the answers -- a major weakness in the book, in my opinion, is a less-than-complete discussion of the issues surrounding the determination of the elusive "cost of operations". He rather vaguely suggests the application of a basic statistical method that I won't go into here (read the book and see what you think!), but the discussion is a little thin and will hopefully be beefed up in future editions. But, hey, like I said: no one has really cracked the case on this perennial grey area, and Penman's ideas are as good as any I've encountered. Again, though, this book provides the reader with some rather powerful tools with which to tackle financial statements. My only regret is that I bought the softcover international edition to save some cash -- I can honestly say that this is the only textbook I've ever purchased where I wished I had picked up the hardcover edition. Don't make the same mistake. This is a text you will want to refer to time and time again, so just go ahead and buy the real, hardcover deal. I know I'll be picking up my own hardcover copy once the next edition is released. Professor Penman, if you happen to read the reviews here, thanks for the effort and please keep striving to improve on this landmark text!!

I've studied innumerable books on Security Analysis, but have yet to find one that satisfied my desire to fully integrate financial statement analysis with valuation--until now! Penman's book does an excellent job of presenting all the various valuation methods and critiquing the strengths and weaknesses of each one. He does a superb job of showing the relationship between cash flow and accrual accounting and how each relates to valuation. He also shows how corporate strategy affects both the financials and valuation and how to do decent pro formas. For the studious stock analyst, this book is well worth the extra time required to digest its many insights. I rate this book second only to the original Graham and Dodd's Security Analysis.