Chapter 3:introducing financial statements

Question 3-1)

What is wrong with just doing what “works’’ in relation to analysing financial statements? There are plenty of experienced practitioners in our capital markets. Why do we not simply find out what most are doing and do this ourselves? What do you think and why?

By doing what “works” and just comparing the numbers in a firm’s financial statements with no real plan or structure as to how to go about it does not give a very accurate indication of the company’s position.  This system (if you could even call it a system) came about in the 1930s and it seems not much has been done since then to improve it. Yet, much has changed in the world of business and finance since then. Also, comparing one company to another is like comparing apples and oranges… not a very accurate way to judge a firm’s financial position!

Question 3-2)

What is the benefit of having a structure, such as the du Pont Company’s framework, to help use ratios to analyse a firms financial statements? Is it any better (or worse) than simply doing what experienced practitioners do? Why or why not?

To analyse financial statements with a clear cut method or structure, such as the du Pont framework, that has also had numerous studies performed to test its efficiency is in my opinion the best way to go. The benefits are that all companies that are analysed will be done so in the same way. Also, in addition to using a structured approach I think we also need to look at things outside of the firm to get the whole picture. Analysing a firms financial statements without connecting them to its economic and business reality is kind of like buying a car without doing your research; making a decision with only half of the information that is available to you.

KCQs

In section 3.4 it talks about money being worth more now than what it will be in the future… but wouldn’t it be better to leave shares with a company longer so the value of them can go up?