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Book Review: Financial Statement Analysis and Security Valuation

I wasn’t expecting much when I opened the mail to find a review copy of “Financial Statement Analysis and Security Analysis fourth edition.” After reading the book I was pleasantly shocked!

I’ve looked long and hard for a good financial statement analysis book. In academia it’s hard to find a book that doesn’t use the words beta, alpha, or efficient market theory on every second page. The texts used in both my undergrad and MBA classes taught the (very) flawed efficient market hypothesis.

In this book, Stephen Penman, professor at value investing school Columbia University, pens a thorough exploration of security valuation based on financial statements. Gone are the numerous references to academic fluff. Instead, readers discover a text influenced by the likes of Warren Buffett and Benjamin Graham. The text is underpinned by tenets such as, “one buys a business and not a stock” which when combined with the detailed financial explanations give the reader a profitable investment framework. Penman debunks a lot of common (and simple) financial formulas by showing their limitations.

Purchasing a stock is purchasing an interest in the underlying business. Penman helps readers of this text learn to view a business through the lens of financial statements. You will be a slave to GAAP unless you know its limitations. The financial statements tell a story and this text gives you the tools you need to decode that story and think independently. This text clearly explains the difference between what is good and what looks good. 

This is by far the best academic text I’ve read on financial statement analysis. Penman covers topics with enough detail that even experienced investors will find something of interest here. 

Financial Statement Analysis and Security Valuation, by Stephen Penman (McGraw-Hill, March 2010).

Disclosure: No position