Financial statement analysis is an essential skill in a variety of occupations including investment management, corporate finance, commercial lend­ing, and the extension of credit. For individuals engaged in such activities, or who analyze financial data in connection with their personal investment decisions, there are two distinct approaches to the task.

The first is to follow a prescribed routine, filling in boxes with standard financial ratios, calculated according to precise and inflexible definitions.

This book is aimed at the analyst who will adopt the second and more rewarding alternative, the relentless pursuit of accurate financial profiles of the entities being analyzed. Tenacity is essential because financial state­ments often conceal more than they reveal. To the analyst who pursues this proactive approach, producing a standard spreadsheet on a company is a means rather than an end. Investors derive but little satisfaction from the knowledge that an untimely stock purchase recommendation was sup­ported by the longest row of figures available in the software package. Gen­uinely valuable analysis begins after all the usual questions have been answered. Indeed, a sup erior analyst adds value by raising questions that are not even on the checklist.

Some readers may not immediately concede the necessity of going be­yond an analytical structure that puts all companies on a uniform, objective scale. They may recoil at the notion of discarding the structure altogether when a sound assessment depends on factors other than comparisons of standard financial ratios. Comparability, after all, is a cornerstone of gen­erally accepted accounting principles (GAAP). It might therefore seem to follow that financial statements prepared in accordance with GAAP neces­sarily produce fair and useful indications of relative value.

The corporations that issue financial statements, moreover, would ap­pear to have a natural interest in facilitating convenient, cookie-cutter analysis. These companies spend heavily to disseminate information about their financial performance. They employ investor-relations managers, they communicate with existing and potential shareholders via interim financial reports and press releases, and they dispatch senior management to peri­odic meetings with securities analysts. Given that companies are so eager to make their financial results known to investors, they should also want it to be easy for analysts to monitor their progress. It follows that they can be expected to report their results in a transparent and straightforward fash­ion... or so it would seem.