Analysis of Financial Statements, 3rd Edition

CHAPTER 7

Measuring Company Performance

In previous chapters, we saw that we can use financial statement information, and the ratio analysis of these statements, to get an idea of a company's performance. However, financial statement information may be problematic. Accounting principles are continually updated to provide for the best representation of a company's operating performance and financial position, yet because we apply a set of general accounting principles to companies in a variety of businesses, and because that financial information can be managed through a judicious use of accounting principles, concerns are raised about whether financial statement information is useful in financial analysis and valuation. Further, just looking at the values and income from the reported financial statements does not provide all the information we need to make projections about the future performance of a company.

So why not just look at stock prices as a measure of performance? If we dispose of financial statement information and focus solely on stock prices we have simply substituted one set of concerns for another. Evaluating a company's performance is much more challenging than looking at stock prices. If stock prices rise in a given period, does that mean the company is doing well? Not necessarily—the stock price may not be as high as it should be, given economic and market conditions. If a company's stock price declines during a given period, does that mean that the company ...