CONCLUSION
As noted at the outset of this chapter, valuations derived from financial statements represent only a portion of the analyses being conducted by millions of stock buyers and sellers during each trading session.
Indeed, the split-second decision making of traders on the exchange floors can scarcely be described as analysis of any kind. Rather, it amounts to a highly intuitive response to momentary shifts in the balance of supply and demand.For the investor who takes a longer view, however, financial statement analysis provides an invaluable reference point for valuation. A stock may temporarily soar or plummet in frenzied reaction to a development of little ultimate consequence. Eventually, however, rationality usually reasserts itself. The share price then returns to a level that is justifiable on the basis of the company’s long-range capacity to generate earnings and cash. Focusing on breakup values, as well as P/E and EBITDA multiples, is consistent with this thesis. Ultimately, the value of previously “unrecognized” assets likewise rests on their potential to generate cash, which must be measured in the context of previous performance. By studying the company’s historical financial statements to forecast its future results, the analyst can derive an intrinsic value for a stock that is unaffected by the market’s transitory mood.