The Moorad Choudhry Anthology, + Website

CHAPTER 9Financial Statements, Ratio Analysis, and Credit Analysis

“He critically failed to delegate or appoint talented people lest they undermine his overall authority. Instead he promoted those whose weaknesses he understood and could exploit. Competence was not an issue.”

—James Wyllie, Goering and Goering: Hitler's Henchman and his Anti‐Nazi Brother, The History Press, 2006

In this chapter, we present basic concepts in investment analysis for equities, beginning with the financial structure of the firm. We then consider the fair pricing of an equity, dividend policy, financial ratio analysis and basic concepts in assessing the cost of capital. The book extract section considers relative value analysis in the context of debt instruments, so that the reader can determine the differences in approach compared to equity instruments.

Firm Financial Structure and Company Accounts

A corporate entity or firm is governed by the types of equity capital it can issue as stipulated in its memorandum and articles of association. In the past, in the UK market at least, firms would issue different classes of shares including “A” shares that carried restricted voting rights. However, this was not encouraged by the Stock Exchange and the most common form of share in the market is the ordinary share, which is known as common stock in the US market. The holders of ordinary shares are entitled to certain privileges, including the right to vote in the running of the company, the right to ...