Unlocking Financial Data

Chapter 5. Financial Data Analysis

It is a capital mistake to theorize before one has data.

Sherlock Holmes

The data we collected in earlier chapters can help determine a security’s intrinsic or absolute value, but it doesn’t tell the entire story; we need context. For instance, knowing that a company’s stock price is up 5 percent in the last six months does not inform you whether the company outperformed or underperformed the overall market or its peers. The goal of financial analysis, and the purpose of this section, is to make sense of financial data and put it into context to support investment decisions.

The following chapters split financial analysis into three categories:

Relative value analysis

Chapter 6 explores techniques to compare an individual security to its peers and the broader market. Relative value is more than simply comparing past performance of two securities: it is determining whether one security is rich or cheap relative to another. This is much easier said than done because quantifying the upside and downside of each investment is subjective and ultimately at the heart of what makes a successful analyst. For example, if two bonds are trading at a discount to par and have similar credit risk but one of them matures a year earlier than the other, how much additional yield should the longer bond have to make them equivalent investments? The answer depends on a lot of different factors including your market outlook. Chapter 6 goes over how to weigh these ...