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Book Review: The Interpretation Of Financial Statements By Benjamin Graham

19 May

Benjamin Graham (1894-1976), the father of value investing, has been an inspiration for many of today’s most successful businesspeople. He is also the author of Securities Analysis and The Interpretation of Financial Statements.

Benjamin Graham has been called the most important investment thinker of the twentieth century. As a master investor, pioneering stock analyst, and mentor to investment superstars, he has no peer.

The Interpretation of Financial Statements is a wonderful reference guide for those who want to understand published financial statements and reports. Although some of the information is slightly out of date, you can be sure this book will still be useful in twenty years.

graham divided the book into three parts;

Part I:  Balance Sheets And Income Accounts

Part I is about half the book and consists of small chapters (2-4 pages each) focusing on a single topic.  There are chapters on the Current Ratio (and how to calculate it), Working Capital, Inventories, Receivables, Capital And Surplus, Notes Payable, Reserves, Earning Power, and many other topics.  Each chapter completely explains and encapsulates the idea, tells you how to calculate it (if there’s math involved), relates why this particular entry or ratio is important, and gives an example to flesh out the idea.  Needless to say, this approach is absolutely invaluable as a concise learning tool or a quick brushup on a ratio that perhaps you haven’t used for a while.  But don’t let the brevity fool you either:  a beginner could easily learn everything necessary to become functionally competent in any of these areas just by reading the corresponding chapter and working through the examples.

Towards the end of this section, Graham puts it all together and works through typical industrial and railroad income accounts, calculates earnings from all the constituent parts, and even describes how to determine the safety of common stock dividends, interest payments.  The last chapter of this section, ultimately, gives an overview of how to determine the value of a common stock and relate it to the current price.

Part II:  Analyzing A Balance Sheet And Income Account By The Ratio Method

If part I contains the tools of the trade, part II is its bread and butter.  In it, Graham explains the ratio method (the now-popular P/E, P/B, etc) and does a complete analysis from top to bottom, stopping to explain all the relevant details and points of difficult.  The example used is a real-life one from a company you may have heard of, Bethlehem Steel (still going strong in Graham’s day).  Seeing the important ratios calculated and interpreted by a master of the craft proves extremely valuable and is something beginners and expert investors alike can learn something from.  Where in Security Analysis Graham’s hands-on writing approach can sometimes be overwhelming, here it’s brief enough to allow you to wrap your head around it without sacrificing accuracy or usefulness.

Part III:  Definitions Of Financial Terms And Phrases

Part III is exactly what it sounds like, a glossary of important financial terms and phrases you’re likely to hear on TV and see in financial statements.  This section is useful as a reference, but keep in mind some of the terms have changed since Graham wrote this book.  Still, it will be obvious what he’s talking about even if the name has changed.

Conclusion And Criticism

The pros of this book are, It offers an explanation of the most common terms found on financial statements; Gives ratios and formulas for investors to calculate Includes many examples.

The book is Small, easy to carry edition with classic typeface. Makes an excellent business gift for clients and colleagues.

The main flaw of this book, of course, is its age. some of the information is dated due to changes in accounting rules.The reader should have a working knowledge of stocks

Modern secuirty analysis makes extensive use of the Cash Flow Statement, a statement, of course, that didn’t even exist in Graham’s day.  Needless to say, you won’t find anything about cash flow here.  Still, the current account and earning power are every bit as important today as they were in 1936.  Hence, The Interpretation Of Financial Statements should be used as a jumping-off point for modern investors and not as a complete solution.

I recommend this book to every business managers, Head of departments and general managers, Directors, Investors and potential investors, Auditors, accountants and Business students. You can get your copy from www.amazon.com or in Tanzania at all the bookshops in Dar es Salaam.

Have a nice weekend everyone and Happy reading.

 

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1 Comment

Posted by on May 19, 2012 in Books and Articles Reviews

 

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One response to “Book Review: The Interpretation Of Financial Statements By Benjamin Graham

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    May 20, 2012 at 12:34 pm

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