Financial Statement Analysis and Fundamental Analysis

Investment Snapshot

* Leading companies in their industries are not immune from ending up in bankruptcy.
* One of Enron’s goals was to become the biggest company in the world.
* Enron became the largest bankruptcy on record.
* Laws and regulations such as the Sarbanes-Oxley Act will not insulate investors from poor investments.

Why bother with financial statement analysis and number crunching to determine in which stocks to invest? It is easy for investors to follow the published buy, sell, and hold ratings of analysts with regard to which investments to make.

The process isn’t quite that simple, though. The lesson you can learn from the bankruptcies of Enron, WorldCom, and others (in addition to the stock research abuses by analysts) is that investors must look out for themselves. State and federal regulators fined many investment banks and brokerage firms for their analysts’ conflicts of interest between their investment banks and their stock research recommendations. Enron and WorldCom showed that investing in the leading companies in their industries also was not foolproof.

Consequently, politicians and regulators created laws and regulations in the hopes of making investors feel safe. But even if auditors are more thorough in their examinations of financial statements, greedy executives still will be hired, and boards of directors still will “rubber stamp” the wishes and deeds of management teams. Laws and regulations still will not insulate investors from poor investments and the misdeeds of strategists, analysts, and executives, so investors must scrutinize financial statements, including those of the largest companies. Finding a company with a strong financial position based on analysis of its financial statements goes a longer way than listening to the recommendations of those who have their own motives for generating their investment opinions.

KEY CONCEPTS
* Financial statement analysis
* Competitive analysis
* Assessing the financial strengths and weaknesses of a company

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