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?