Financial Accounting for Investing

[tay9]

Any recommendations on books or resources to get a better in this area? Particularly something with a deliberate process or structure when analyzing financials / key metrics (ex. ROIC, GM, etc).

 

My due diligence on the financial side is lacking. I know basic metrics like P/E, P/B are not enough.  I've primarily been focused has been looking at the bigger picture, strategy, product positioning, and competitive advantages, and I feel like I am not diligent enough when looking at the fins, capital structure, credit, etc.

 

Anyways, thanks.

[widenthemoat]

Stephen Penman has some really great books on this, in my opinion. He is one of the few authors that I know of that takes both accounting and investing and intertwines the two subjects.

 

Textbook

https://www.amazon.com/Financial-Statement-Analysis-Security-Valuation/dp/0078025311/ref=sr_1_1?dchild=1&keywords=stephen+penman&qid=1611354466&sr=8-1

 

Lighter Reading

https://www.amazon.com/Accounting-Columbia-Business-School-Publishing/dp/0231151187/ref=sr_1_2?dchild=1&keywords=stephen+penman&qid=1611354466&sr=8-2

[mattee2264]

 

I found Stephen Penman a difficult read and I am an accountant!

 

https://www.amazon.co.uk/Financial-Statement-Analysis-Practitioners-Finance/dp/0470635606

 

Above book by Fridson and Alvarez is a classic and quite discursive

[bookie71]

Go to the library and check out a couple of elementary accounting books.  Read the chapters on "ratios" and you will have a good start. Get at least 2 versions as usually one will click with you more than the other.

There are other books on just analyzing financial statements, but first you must walk then you can run.. THEN you can get Benjamin Graham's books

 

[tay9]

Thanks for the suggestions so far. I'm excited to dive into them.

[Cigarbutt]

^Many roads lead to Rome but (from what you mention) i'd consider the CFA material (the previous editions would likely work fine for your purpose).

You can go on ebay and get 'pre-owned' editions: Level I, volume 3 and Level II, volume 2, each titled Financial Reporting and Analysis.

Here's some kind of a condensed form which i just googled, to be used as a sample if you like the style:

https://www.cfainstitute.org/-/media/documents/support/programs/investment-foundations/7-financial-statements.ashx?la=en&hash=19AC47831720AC9675778BBB6C15BE6CFF4BAF75

If you want to go deeper, there are many options with basic (and boring to various degrees) accounting texts and you want a text that fits with your reading (and comprehension) style. There's Intermediate Accounting (12th edition, Kieso and others) which i still use and like, to work around specific questions with updates from the world wide web.

 

[D33pV4lue]

Depends how deep into the weeds you want to get. Agree with Cigarbutt the CFA material is really good but it reads like a textbook so if thats not what your looking for you might get bored.

 

Quick Read

https://www.amazon.com/Interpretation-Financial-Statements-Benjamin-Graham/dp/0887309135

 

Deeper dive

https://www.amazon.com/Financial-Shenanigans-Accounting-Gimmicks-Reports/dp/0071703071/ref=sr_1_2?dchild=1&gclid=CjwKCAiA9bmABhBbEiwASb35V1yBR2gkIYWHwu-9l_6iRuL7WaThJYZ-JzdA_dqITzn3h67qe1QschoCZM8QAvD_BwE&hvadid=241659046490&hvdev=c&hvlocphy=9067609&hvnetw=g&hvqmt=e&hvrand=3665366763512062860&hvtargid=kwd-131267602&hydadcr=21901_10170939&keywords=financial+shenanigans&qid=1611591057&sr=8-2&tag=googhydr-20

[KJP]

McKinsey's Valuation treatise may work for you.  It does a good job of, among other things, walking you step-by-step on how to rearrange GAAP financial statements to look at underlying returns on capital.

[LC]

There's Intermediate Accounting (12th edition, Kieso and others) which i still use and like, to work around specific questions with updates from the world wide web

 

There must be a certain Canadian slant here because the Kieso book was also my financial accounting textbook, way back when.

 

Personally I think financial accounting changes at a snails pace and is relatively straightforward, any used textbook from the last few years will be just fine.

 

The McKinsey valuation book and other such books do touch heavily on financial statements but are also very involved with what metrics are important and why. It is a good primer.

 

Other aspects you are mentioning will touch other topics such as marketing, distribution, product/industry specifics...many of this is only learned with experience or specific expertise (e.g. medical knowledge, engineering knowledge, etc.)

[tay9]

Thanks for the additional input everyone. Looks like I have some work ahead of myself.