Sources of Financial Information For the most part, our discussion in this chapter has been limited to the kinds of analysis that can be performed by external users who do not have access to the company’s accounting records.
Investors and creditors must rely to a considerable extent on the financial statements published in annual quarterly reports. In the case of publicly owned corporations additional information is tiled with the Securities and Exchange Commission (SEe) and is available to the public in “hard copy,” as well as on the Internet. In fact, the Internet is by far the fastest growing source oi free information available to decision makers in this information age. (See Appendix B for a variety of Internet exercise and problem matcrials.)
Many financial analysts who evaluate the financial statements and future prospects 01′ publicly owned companies sell their conclusions and investment recommendations for a fee. For example, detailed financial analyses of most large companies are available from Standard & Poor’s, Moody’s Investors Service, and
The Value Line Investment Survey. Anyone may subscribe to these investment services. Bankers and major creditors usually are able to obtain detailed financial information from borrowers simply by requesting it as a condition for granting a loan. Suppliers and other trade creditors may obtain some financial information about almost any business from credit-rating agencies, such as Dun & Bradstreet. ‘.
Financial Analysis and Stock Price Assume that a company has rapidly increasing net sales and earnings, and also. earns high returns on assets and stockholders’ equity. Is its stock a “good buy” at the present price? Maybe; but maybe not. Stock prices, like ratios, are a measure of investors’ expectations.
A company may be highly profitable and growing fast. But if investors had expected even better performance, the market price of its stock may decline. Similarly, if a troubled company’s losses are smaller than expected, the price of its, stock may rise. In financial circles, evaluating stock price by looking at the underlying profitability of the company is termed fundamental analysis.
This approach to investing works better if! the long run than ,in the short run. In the short run, stock prices can be significantly affected by many factors, including short-term interest rates, current events. fads. and rumors. ‘But in the long run, good companies increase in value In summary, successful investing requires more than an understanding of accounting concepts.
It requires experience. judgment. patience. and the ability to absorb some losses, But a knowledge of accounting concepts is invaluable to the long-term investor-and it reduces the risk of “getting burned.” Summary of Analytical Measurements The financial ratios and other measurements introduced throughout this textbook, including this chapter-and their significanture summarized below and on.