The Power of Ratios

The eyes may or may not be a window into the soul, as Immanuel Kant suggested, but ratios are definitely a window into a company’s financial statements. They offer a quick shortcut to understanding what the financials are saying. A Paine Webber analyst named Andrew Shore knew this and used his skill at analyzing ratios to tell the public about a fraudulently managed company—Sunbeam, when it was run by the notorious CEO “Chainsaw Al” Dunlap. We’ve mentioned Sunbeam before in this book, but now we want to relate a few more of the sorry details.

Dunlap had arrived at Sunbeam in early 1997. By the time he got there, he already had a great reputation on Wall Street and a standard modus operandi. He would show up at a troubled ...

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