ABSTRACT
The chapter explains the essential structure of the firm’s financial statements, combined with a “ratio analysis” aimed at achieving an insightful assessment of the firm. Following Warren Buffett, the firm’s free cash flow, its Return on Assets (ROA) and return on Equity (ROE) are fundamental to an evaluation of the company’s viability and its earnings prospects. The company’s accounting statements presented in this chapter likely represent a much simplified version of the accounting statements of a real company. The intention, however, is not to make the reader an accomplished forensic accounting auditor in one easy chapter. Indeed, a little knowledge can be dangerous. However, at the end of the chapter, the reader will have achieved a firm grasp of the potential of the accounting statements to assist the analyst to arrive at a “buy”, “hold”, or “sell” recommendation for the firm’s shares.
