The Art of Company Valuation and Financial Statement Analysis: A Value Investor's Guide with Real-life Case Studies

Chapter 1

Introduction

By means of this he can at any time survey the general whole, without needing to perplex himself in the details. What advantages does he derive from the system of book-keeping by double entry! It is among the finest inventions of the human mind.

Johann Wolfgang von Goethe

 

Accounting is the language of businesses. Those who wish to value companies and invest successfully in the long term have to be able to understand and interpret financial statements. The primary purpose of accounting is to quantify operational processes and to present them to stakeholders including shareholders and creditors but also suppliers, employees and the financial community. The financial statement forms a condensed representation of these processes. It delineates the assets and liabilities as well as performance indicators such as turnover, profit and cash flow. Evaluating and interpreting this data against the background of business activity is an important component of the valuation process. Developing an understanding of this ‘language of businesses’ and, at the same time, including qualitative factors in the analysis provides a solid foundation for anyone interested in valuing enterprises. Accountancy illustrates, in one snapshot, the corporate world in the past and the present. Company valuation joins in at this point and attempts to predict the future development and the risks of an enterprise with the help of data obtained from the financial statement. This chapter addresses ...