Financial Analysis: A User Approach

By Ahlgrim, Kevin C. | Journal of Risk and Insurance, September 2004 | Go to article overview

Financial Analysis: A User Approach


Ahlgrim, Kevin C., Journal of Risk and Insurance


Financial Analysis: A User Approach, by Gary Giroux, 2003, Hoboken, NJ: John Wiley & Sons

Financial analysis has become more important than ever, as indicated by Gary Giroux in his book Financial Analysis: A User Approach, Business activity is accelerating and information is more readily available than in the past, thanks to financial portals on the World Wide Web. This creates an environment where the timely use of data for financial decision are paramount. In the past, the lack of information meant that when making financial decisions, relatively more weight was applied to gut instinct rather than sound analysis. The speed and availability of new information and sound financial analysis allows decision makers to reduce uncertainty and be consistent over time, hopefully leading to better decisions. Giroux's book reviews the steps of financial analysis and highlights some of the major accounting policies that may impact financial decision making.

The text is loosely organized into three major subject areas, although not explicitly partitioned by the author: (1) background and tools, (2) impact of accounting policies, and (3) making the decision.

The first part (Chapters 1-6) races through some background material related to the financial marketplace, the structure of financial statements, and basic ratio analysis. While the first part of the book is meant to complete the content in the area, it is too short and too simple based on the more rigorous discussions that are presented later in the book.

Chapter 1 defines the role of financial analysis and provides a six step, systematic process for making financial decisions. Giroux points out that similar techniques are applied to a variety of problems including lending decisions, capital budgeting, internal performance attribution, and of course, security analysis. The six step financial analysis process can be used for these and similar financial decisions. Many individuals seem to pigeonhole financial analysis into the realm of financial statement analysis, but Giroux explains that the subject has more breadth.

Chapter 2 contains a smattering of topics meant to provide readers with background about the financial environment. Specific issues addressed, including regulatory oversight by the Securities and Exchange Commission and the structure of the Financial Accounting Standards Board, illustrate the accounting bias that permeates the text (Dr. Giroux is in the Accounting Department at Texas A&M University). The presentation of finance is cursory and only scratches the surface of a necessary background in understanding financial markets. In particular, Giroux does not discuss the role of financial intermediaries in the markets and completely ignores the Federal Reserve.

Chapter 3 provides a review of the major financial statements including balance sheet, income statement, statement of cash flows, and statement of stockholders' equity. Chapter 4 discusses financial ratio analysis-employing financial statement data to calculate comparison figures of performance. The author demonstrates ratio analysis with Dell Computer, comparing the results to some competitors (Gateway and Apple) and the industry.

Chapter 4 continues to illustrate the lack of depth of material in the first part of the text. The focus on rote calculations of financial ratios ignores some of the richness presented in even introductory corporate finance textbooks. In particular, there is a section entitled "Limitations of Ratio Analysis." Of the few concerns mentioned in performing ratio analysis, Giroux warns the analyst that the accounting "numbers used are correct," meaning that ratios are only as good as the accounting behind them. While earnings manipulation is an important topic, this is not specific to financial ratios. There are many other limitations that are not mentioned, about which the novice should be concerned. For example, in all of Chapter 4, Dell is benchmarked against two competitors and the industry. …

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