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46 Financial Statement Analysis

Warren Buffett expresses amazement that EMH is still embraced by some scholars and
analysts. This, Buffett maintains, is because by observing correctly that the market is fre-
quently efficient, they conclude incorrectly it is always efficient. Buffett declares, “the dif-
ference between these propositions is night and day.”

Analysis Research
TIT ANIC EFFICIENCY

If the market’s reaction to the sink- International Mercantile Marine market-adjusted returns on IMM’s
ing of the Titanic in 1912 is any (IMM) that was traded on the stock (covering the day the news of
guide, investors were pretty sharp NYSE. The ship cost $7.5 million the tragedy broke and the day after)
even in the pre-“efficient market” and was insured by Lloyd’s for reflect a decline of $2.6 million in the
era. The Titanic was owned by $5 million, so the net loss to IMM value of IMM—uncannily close to
White Star Line, a subsidiary of was about $2.5 million. The two-day the $2.5 million actual net loss.
Source: BusinessWeek (1998)

BOOK ORGANIZA TION

This book is organized into 11 chapters in three parts, see Exhibit 1.15. Part I, covering
Chapters 1–2, introduces financial statement analysis. Chapter 1 examines business
analysis and provides a preview of selected financial statement analysis techniques.
Chapter 2 focuses on financial accounting—its objectives and its primary characteristics.
It also explains the importance of accrual accounting, its superiority over cash flow
accounting, and provides an overview of accounting analysis. Part II, covering

Exhibit 1.15 Organization of the Book

Financial Statement Analysis

Part 1
Part 2 Part 3
Introduction and
Accounting Analysis Financial Analysis
Overview
Chapter 3: Analyzing Chapter 7: Cash Flow
Chapter 1: Overview Financing Activities Analysis
of Financial
Statement Analysis
Chapter 4: Analyzing Chapter 8: Return on
Investing Activities Invested Capital and
Chapter 2: Financial Profitability Analysis
Reporting and Chapter 5: Analyzing
Analysis
Investing Activities: Chapter 9: Prospective
Intercorporate Analysis
Investments
Chapter 10: Credit
Chapter 6: Analyzing Analysis
Operating Activities
Chapter 11: Equity
Analysis and Valuation