Vause - Guide to Analysing Companies

GUIDE TO ANALYSING COMPANIES

A. H. (BOB) VAUSE is a fellow of the Institute of Chartered Accountants and an Emeritus Fellow of Green Templeton College, Oxford, where he taught for more than thirty years. He is the author of several books and has worked as consultant to many large companies on a broad range of matters affecting performance and control.

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GUIDE TO ANALYSING COMPANIES

6th edition

Bob Vause

The Economist in Association with Profile Books Ltd. and PublicAffairs

Analysing Companies (6th Edition)

PublicAffairs

New York

The Economist in Association with Profile Books Ltd. and PublicAffairsCopyright The Economist Newspaper Ltd 1997, 1999, 2001, 2005, 2009, 2014Text copyright A.H. Vause 1997, 1999, 2001, 2005, 2009, 2014First published in 1997 by Profile Books Ltd. in Great Britain.Published in 2015 in the United States by PublicAffairs, a Member of the Perseus Books Group

All rights reserved.Printed in the United States of America.No part of this book may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book, except in the case of brief quotations embodied in critical articles and reviews. For information, address PublicAffairs, 250 West 57th Street, 15th Floor, New York, NY 10107.

The greatest care has been taken in compiling this book. However, no responsibility can be accepted by the publishers or compilers for the accuracy of the information presented.Where opinion is expressed it is that of the author and does not necessarily coincide with the editorial views of The Economist Newspaper.

While every effort has been made to contact copyright-holders of material produced or cited in this book, in the case of those it has not been possible to contact successfully, the author and publishers will be glad to make amendments in further editions.PublicAffairs books are available at special discounts for bulk purchases in the U.S. by corporations, institutions, and other organizations. For more information, please contact the Special Markets Department at the Perseus Books Group, 2300 Chestnut Street, Suite 200, Philadelphia, PA 19103, call (800) 810-4145, ext. 5000, or e-mail special.markets@perseusbooks.com.

Library of Congress Control Number: 2014950431

ISBN 978-1-61039-478-9 (PB)

ISBN 978-1-61039-479-6 (EB)

First Edition10 9 8 7 6 5 4 3 2 1

List of figures

Introduction

THE AIM OF THIS BOOK is to provide an understanding of how to analyse and assess the performance and financial position of a company from the various sources of information available. Financial analysis is as much an art as it is a science. Combine any two figures from an annual report and a ratio is produced; the real skill is in deciding which figures to use, where to find them and how to judge the result.

Before attempting to analyse a company, a sound grasp of financial terminology and presentation is required. of this book explains the content and intent of the main financial statements appearing in a companys annual report: the statement of financial position (balance sheet); the income statement (profit and loss account); and the statement of cash flows. Two newcomers, the statement of comprehensive income and the statement of changes in equity, are also covered.

All countries and companies share the basic accounting framework used in the preparation of financial statements, but their presentation is not yet completely standardised. Adjustments may have to be made, but the outline in is applicable to most companies and countries. Reference is made to UK and US GAAP (generally accepted accounting principles) as well as the appropriate International Accounting Standards or International Financial Reporting Standards (IAS or IFRS), but there is no attempt at a detailed interpretation of their application. This is an area of study you may move on to after this book.

As far as possible, the examples given have been kept simple in order to emphasise or reinforce the subject matter; once the fundamental theory and practice are grasped there should be no problem in moving to more detailed and sophisticated analysis. In general, the books examples focus on retail, service and manufacturing companies rather than banks and other financial services companies, which are subject to a different set of legal and reporting requirements.