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Accounting for Value
Accounting for Value teaches investors and analysts how to handle accounting in evaluating equity investments. The book's novel approach shows that valuation and accounting are much the valuation is actually a matter of accounting for value.
Laying aside many of the tools of modern finance—the cost-of-capital, the CAPM, and discounted cash flow analysis—Stephen Penman returns to the common-sense principles that have long guided fundamental price is what you pay but value is what you get; the risk in investing is the risk of paying too much; anchor on what you know rather than speculation; and beware of paying too much for speculative growth. Penman puts these ideas in touch with the quantification supplied by accounting, producing practical tools for the intelligent investor.
Accounting for value provides protection from paying too much for a stock and clues the investor in to the likely return from buying growth. Strikingly, the analysis finesses the need to calculate a "cost-of-capital," which often frustrates the application of modern valuation techniques. Accounting for value recasts "value" versus "growth" investing and explains such curiosities as why earnings-to-price and book-to-price ratios predict stock returns. By the end of the book, Penman has the intelligent investor thinking like an intelligent accountant, better equipped to handle the bubbles and crashes of our time. For accounting regulators, Penman also prescribes a formula for intelligent accounting reform, engaging with such controversial issues as fair value accounting.
Laying aside many of the tools of modern finance—the cost-of-capital, the CAPM, and discounted cash flow analysis—Stephen Penman returns to the common-sense principles that have long guided fundamental price is what you pay but value is what you get; the risk in investing is the risk of paying too much; anchor on what you know rather than speculation; and beware of paying too much for speculative growth. Penman puts these ideas in touch with the quantification supplied by accounting, producing practical tools for the intelligent investor.
Accounting for value provides protection from paying too much for a stock and clues the investor in to the likely return from buying growth. Strikingly, the analysis finesses the need to calculate a "cost-of-capital," which often frustrates the application of modern valuation techniques. Accounting for value recasts "value" versus "growth" investing and explains such curiosities as why earnings-to-price and book-to-price ratios predict stock returns. By the end of the book, Penman has the intelligent investor thinking like an intelligent accountant, better equipped to handle the bubbles and crashes of our time. For accounting regulators, Penman also prescribes a formula for intelligent accounting reform, engaging with such controversial issues as fair value accounting.
244 pages, Hardcover
First published December 10, 2010
35 people are currently reading
1318 people want to read
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Displaying 1 - 28 of 28 reviews
May 10, 2012
Dry for some but very interesting and well done for value investors. The discussion on the mechanics of mark to market accounting the philosophy of accounting are very interesting. For 99% of people this would be like reading a plumbing manual, for investors it is very helpful. Penman is big on the ethics of corporate value representation, a very important issue.
August 22, 2018
I read this book a year ago and have thought about it since then. It felt like I had missed something important and that I needed to re-read it. I’m happy I did. The Business Professors at Columbia University have done it again. Accounting for Value is another truly interesting valuation book from the center of valuation excellence. But the underlying topic of the book is a bit surprising to an initial doubter. Accounting?
Accounting for value, the Penman way, is far more value added than it sounds. I will still use the Greenwald approach as my base valuation technique. But I have to agree with Penman that most valuation approaches are built on lots of guesstimates. That goes for the Greenwald approach as well, even though there are less of them compared to DCF techniques like Copeland’s. The main advantage with Penman’s approach is that it separates what we “know” from accounting from speculations about the future. I have started to use “Accounting for value” as a reality check to my “Greenwald Fair Values”. For screeners, the Penman approach using accounting data for real valuation calculations is most probably better than simple key ratios like P/E, Price/Book etc.
Like Ben Graham, Penman’s focus is to fight the animal spirits of Mr. Market by being careful of paying for more than accounting certainties. His starting base is the level and rate of change in book value of equity. Be really skeptical of paying for growth. Profitable growth is scarce. And never pay for returns created by leverage. Beware of using stock prices in determining fair values. Instead use Mr. Markets pricing to understand expectations. All of Penman’s adjustments to true returns and growth are a delight to view.
In addition to the main part of the book - valuation theory based on accounting - there are two topics that are positive spillovers. Penman’s review of the advantages (mainly) and disadvantages with cost accounting versus GAAP/IFRS raised my awareness of these issues immensely. We need to debate these issues much more. Mark to market value sounds so obviously right, but can we really trust and handle these sometimes subjective values in the next step from today’s financial instruments to tomorrow’s inventory or PPE?
The other topic is Penman’s introductory discussion on valuation theory (often with recaps from Ben Graham’s thinking), the EMH theory and behavioral finance. He blends these topics with a pure elegance seldom seen in a balanced conclusion where P (price) doesn’t necessarily equal V (value). Even James Montier can get intellectual, objective arguments from Penman.
But I don’t agree with Penman on two issues. Unlike Penman, I am very doubtful of the Fed Model and its explanatory power. And far more important, I don’t fully understand how he decides when a company is genuinely value creating - when returns are above cost of capital (in EVA-terms). To me, this must be based on true values and not on accounting book values. Only then is g (the growth component) a factor to consider in the “valuation formula”. I will buy the new edition of his “Financial Statement Analysis and Security Valuation” to find out.
This is one of few books on accounting that is an easy-read. The language is far better than most investing books (although to be honest, there are some repetitions of expressions). A year ago, I would have rated Accounting for Value a 2. Now it gets a 1. Today, I better appreciate Penman’s strong argument for his method of prudent accounting valuation. And he also gets some bonus for the best attack - to my knowledge - on the inconsistent way most equity analysts calculate cost of capital (WACC).
Accounting for value, the Penman way, is far more value added than it sounds. I will still use the Greenwald approach as my base valuation technique. But I have to agree with Penman that most valuation approaches are built on lots of guesstimates. That goes for the Greenwald approach as well, even though there are less of them compared to DCF techniques like Copeland’s. The main advantage with Penman’s approach is that it separates what we “know” from accounting from speculations about the future. I have started to use “Accounting for value” as a reality check to my “Greenwald Fair Values”. For screeners, the Penman approach using accounting data for real valuation calculations is most probably better than simple key ratios like P/E, Price/Book etc.
Like Ben Graham, Penman’s focus is to fight the animal spirits of Mr. Market by being careful of paying for more than accounting certainties. His starting base is the level and rate of change in book value of equity. Be really skeptical of paying for growth. Profitable growth is scarce. And never pay for returns created by leverage. Beware of using stock prices in determining fair values. Instead use Mr. Markets pricing to understand expectations. All of Penman’s adjustments to true returns and growth are a delight to view.
In addition to the main part of the book - valuation theory based on accounting - there are two topics that are positive spillovers. Penman’s review of the advantages (mainly) and disadvantages with cost accounting versus GAAP/IFRS raised my awareness of these issues immensely. We need to debate these issues much more. Mark to market value sounds so obviously right, but can we really trust and handle these sometimes subjective values in the next step from today’s financial instruments to tomorrow’s inventory or PPE?
The other topic is Penman’s introductory discussion on valuation theory (often with recaps from Ben Graham’s thinking), the EMH theory and behavioral finance. He blends these topics with a pure elegance seldom seen in a balanced conclusion where P (price) doesn’t necessarily equal V (value). Even James Montier can get intellectual, objective arguments from Penman.
But I don’t agree with Penman on two issues. Unlike Penman, I am very doubtful of the Fed Model and its explanatory power. And far more important, I don’t fully understand how he decides when a company is genuinely value creating - when returns are above cost of capital (in EVA-terms). To me, this must be based on true values and not on accounting book values. Only then is g (the growth component) a factor to consider in the “valuation formula”. I will buy the new edition of his “Financial Statement Analysis and Security Valuation” to find out.
This is one of few books on accounting that is an easy-read. The language is far better than most investing books (although to be honest, there are some repetitions of expressions). A year ago, I would have rated Accounting for Value a 2. Now it gets a 1. Today, I better appreciate Penman’s strong argument for his method of prudent accounting valuation. And he also gets some bonus for the best attack - to my knowledge - on the inconsistent way most equity analysts calculate cost of capital (WACC).
December 27, 2020
I have read this book to have an understanding of equity security valuation. It is a topic related to the value investing strategies that varies from other investing strategies like growth investing and short-term trading. I actually started with Aswath Damodaran's book which I found very dry before I shifted to this book which I initially have found it dry too, but at least it explains what risk-premium is. As some of the other books I have read, I saw this book recommended on Reddit. This review reflects my understanding of the author and does not attribute any wrong understanding to him.
In the first pages of the book the author explains the necessity of using accounting numbers and principles in stocks valuation and abstaining from using speculative numbers like (price) to generate the value. He says that we cannot "anchor" on price to do the valuation, and he is holding this position because he does not believe that the pricing of the market is efficient. The author also beautifully explains the drawbacks in some of the modern finance valuation techniques like the CAPM and the financial reporting on GAAP standards. He clearly justifies why the use of the book value in valuation is the most proper way to value a stock against the market price.
The author shows many scenarios and examples on how the future book value of a company can be calculated and then compared to its current market price per share. Unlike modern finance approaches that use discounted dividends or discounted free cash flow, the author discounts what is defined as the residual earnings to estimate future book values. Nevertheless, two chapters are specified to explain how high leverage and/or the conservative nature of the GAAP rules may make the forecast of the future book value unreliable. There is a full chapter in which the author discusses the proper way of defining a "potentially correct" rate of return (or WACC.) Final chapters deal with the GAAP, IFRS, etc and the existing of an immense chance of improving the current GAAP representation of financial reports to serve the investors' in their decision making.
Useful book for individual investors, accountants, and curious people.
In the first pages of the book the author explains the necessity of using accounting numbers and principles in stocks valuation and abstaining from using speculative numbers like (price) to generate the value. He says that we cannot "anchor" on price to do the valuation, and he is holding this position because he does not believe that the pricing of the market is efficient. The author also beautifully explains the drawbacks in some of the modern finance valuation techniques like the CAPM and the financial reporting on GAAP standards. He clearly justifies why the use of the book value in valuation is the most proper way to value a stock against the market price.
The author shows many scenarios and examples on how the future book value of a company can be calculated and then compared to its current market price per share. Unlike modern finance approaches that use discounted dividends or discounted free cash flow, the author discounts what is defined as the residual earnings to estimate future book values. Nevertheless, two chapters are specified to explain how high leverage and/or the conservative nature of the GAAP rules may make the forecast of the future book value unreliable. There is a full chapter in which the author discusses the proper way of defining a "potentially correct" rate of return (or WACC.) Final chapters deal with the GAAP, IFRS, etc and the existing of an immense chance of improving the current GAAP representation of financial reports to serve the investors' in their decision making.
Useful book for individual investors, accountants, and curious people.
February 7, 2016
Very good. Surprisingly makes me want--and realize that I need--to learn more accounting: best concept in the entire book is reverse-engineering for the implicit assumptions in stock prices. One must "solve for x" rather than coming up with all of the variables in something like the DCF, with price being "x." I've been thinking that way myself for a while, which has been helpful, so it's cool to see it laid out (in a better way than my amateur thinking) by a Columbia Prof.
November 4, 2016
Strictly not for beginners . Book is based totally on accounting , Each chapter goes more in depth than previous one , It's a Super-text for accounting & Investing professional . Each concept takes a little time to get your head into but end of it worth the time spent on it .
June 7, 2020
A very good book for practitioners, Penman’s book fuses analysis of value and risk using the balance sheet as a starting point. From it, he separates value which can be known with certainty and what is “speculative” value, providing some tools to access how much one should pay for it.
Despite starting off slowly with a discussion on what generates value, Penman’s goes on to argue about various interesting points, such as:
- Tools for assessing how much one is paying for growth using balance sheet figures as a starting point.
- Why DFC models provide a limited understanding of the value generation of a businesses, how accrual accounting provides superior insight and what can be done to address its shortcomings.
- Limitations of deriving discount rates from CAPM, how to reflect uncertainty and higher risk in the discount rate.
- Separating value generation from operating sources and leverage.
Moreover, the book discusses at length about the relationship of more conservative accounting and higher operational risk, linking these with higher returns, which Penman’s argue that may not be entirely due to stronger business franchise, but rather due to accounting policy choices. Finally, the book does a very strong defense of historical cost measurement versus fair value, providing interesting insight on how it grounds analysis and aligns shareholders’ interests. This gives an important understanding of the shortcomings of the increasing adoption of fair value for financial institutions and its impacts on the business cyclicality, risk assessment and even macroeconomic impacts.
The minor limitation of the book is that certain topics could use more examples, but that does not reduce its merit of combining fundamental value analysis, accounting and risk in a very elegant and easy-to-read way. I look forward to reading Financial Statements Analysis and Security Valuation to get more insight on these topics.
Despite starting off slowly with a discussion on what generates value, Penman’s goes on to argue about various interesting points, such as:
- Tools for assessing how much one is paying for growth using balance sheet figures as a starting point.
- Why DFC models provide a limited understanding of the value generation of a businesses, how accrual accounting provides superior insight and what can be done to address its shortcomings.
- Limitations of deriving discount rates from CAPM, how to reflect uncertainty and higher risk in the discount rate.
- Separating value generation from operating sources and leverage.
Moreover, the book discusses at length about the relationship of more conservative accounting and higher operational risk, linking these with higher returns, which Penman’s argue that may not be entirely due to stronger business franchise, but rather due to accounting policy choices. Finally, the book does a very strong defense of historical cost measurement versus fair value, providing interesting insight on how it grounds analysis and aligns shareholders’ interests. This gives an important understanding of the shortcomings of the increasing adoption of fair value for financial institutions and its impacts on the business cyclicality, risk assessment and even macroeconomic impacts.
The minor limitation of the book is that certain topics could use more examples, but that does not reduce its merit of combining fundamental value analysis, accounting and risk in a very elegant and easy-to-read way. I look forward to reading Financial Statements Analysis and Security Valuation to get more insight on these topics.
April 11, 2021
Short book focusing on fundamentals of accounting valuation with some key points:
- income from operating assets , return on operating assets and , asset turnover should be paramount in any valuation
- never include price of stock in valuation
- use redidual income in order to challenge market price when assesing a company
- make sure to include YOUR required return when assesing if you want to buy a stock or not
- discard write-downs, one time payments , income generated from sale of property and equipment , deferred revenue from the balance sheet
- beware of inventory dipping , back-bleeding and other shenaningans used in accounting
Overall a pretty hard read , with a limited number of ideas , but really really solid ones.
I marked it 4/5 because i think some explanations would have been required when presenting some data samples.
- income from operating assets , return on operating assets and , asset turnover should be paramount in any valuation
- never include price of stock in valuation
- use redidual income in order to challenge market price when assesing a company
- make sure to include YOUR required return when assesing if you want to buy a stock or not
- discard write-downs, one time payments , income generated from sale of property and equipment , deferred revenue from the balance sheet
- beware of inventory dipping , back-bleeding and other shenaningans used in accounting
Overall a pretty hard read , with a limited number of ideas , but really really solid ones.
I marked it 4/5 because i think some explanations would have been required when presenting some data samples.
May 18, 2016
Read it. Re-read it. To get the maximum out of it, one needs to read the concepts in the book regularly.
P.S.:Basic accounting knowledge is required before one can understand it.
P.S.:Basic accounting knowledge is required before one can understand it.
Read
September 21, 2021We follow herds, we are moved by fashion, we are reluctant to realize losses, and we are hampered by overconfi dence and a host of other psychological problems
What are the principles under which you operate?
If you do surrender your money to the care of professionals, you want to be assured that they have an edge.
1. One does not buy a stock, one buys a business
2. When buying a business, know the business
3. Price is what you pay, value is what you get
4. Part of the risk in investing is the risk of paying too much
5. Ignore information at your peril
6. Understand what you know and don’t mix what you know with speculation
7. Anchor a valuation on what you know rather than on speculation
8. Beware of paying too much for growth
9. When calculating value to challenge price, beware of using price in the calculation
10. Return to fundamentals; prices gravitate to fundamentals (but that can take some time)
Price is what the market is asking the buyer to pay, value is what the share is worth.
If current sales are $150 million, what would cause them to climb to $250 million in just three years?
prices gravitate to fundamentals
What are the principles under which you operate?
If you do surrender your money to the care of professionals, you want to be assured that they have an edge.
1. One does not buy a stock, one buys a business
2. When buying a business, know the business
3. Price is what you pay, value is what you get
4. Part of the risk in investing is the risk of paying too much
5. Ignore information at your peril
6. Understand what you know and don’t mix what you know with speculation
7. Anchor a valuation on what you know rather than on speculation
8. Beware of paying too much for growth
9. When calculating value to challenge price, beware of using price in the calculation
10. Return to fundamentals; prices gravitate to fundamentals (but that can take some time)
Price is what the market is asking the buyer to pay, value is what the share is worth.
If current sales are $150 million, what would cause them to climb to $250 million in just three years?
prices gravitate to fundamentals
August 23, 2018
The book started off interesting by discussing simple way to calculate implied valuation metrics and inputs to equity prices. It provided keen insights into other typical valuation metrics as well. However, the book dragged on and was partially repetitive. For instance, the second to last section on accounting left me wanting more examples rather than a qualitative take on what makes a good accounting system. Definitely wouldn't recommend this book as a first read for understansing valuation, but it's worth a skim.
May 20, 2024
Being my first book on fair value estimation, I would say that it does job pretty well on that topic. Keep in mind it requires a prior knowledge of accounting to some degree for you to fully comprehend how the intrinsic value is determined. The first half of the book is especially useful to the intelligent investor and Penman makes frequent references to Graham's book. Lots of formulas are provided, which are always used with numerical examples in order to deliver the idea of Penman.
July 23, 2024
A fantastic follow-up to The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit for me. Took tons of notes and re-read multiple chapters to make sure I understood everything that was going on. It's a rare combination of well-written and information-dense.
May 8, 2021
This is a deep dive through on how we can use accounting concepts to derive at a less subjective valuation on a particular firm. I would say it offers a basic-mid foundation for you to start with, which is useful. However, it is quite a dry read and some concepts may be difficult to understand for someone not versed in accounting.
December 26, 2018
Timely for the current environment where market prices are completely out of sync to fundamentals. It takes accounting and provides a helpful framework for a diligent Buyside equity analyst to better understand how accounting influences valuation.
February 21, 2019
People who want to do value investing should read this book. It details steps to value a business from accounting viewpoints as well as lays down 10 principals for value investors.
Definitely a good read.
Definitely a good read.
November 27, 2019
One of the best investment books out there...
July 1, 2020
I recommend reading first 100 pages. The second half is far less interesting.
December 12, 2021
Certainly informative.. I wish the author provides spreadsheet that does an example valuation.
August 9, 2013
IT is a very practical book on valuation. You can follow the model in it and find the value of a stock as I did.
The logic for the valuation is very strong.
By the way, valuation is based on the Accounting financial sheets data. So it is plausible and workable.
The great interesting point is to use the reverse engineering method to find the growth rate factor for analyst to judge.
The book also provided a simple way to help find the Cost of Equity without using the CAPM model. There is only a big guess if one use CAPM to find the Cost of equity.
Its a book with the model that you can try it out.
It will be great if it provides a list of definitions of all terms used for easy checking. Anyway, its a good tool for stock analysis.
The logic for the valuation is very strong.
By the way, valuation is based on the Accounting financial sheets data. So it is plausible and workable.
The great interesting point is to use the reverse engineering method to find the growth rate factor for analyst to judge.
The book also provided a simple way to help find the Cost of Equity without using the CAPM model. There is only a big guess if one use CAPM to find the Cost of equity.
Its a book with the model that you can try it out.
It will be great if it provides a list of definitions of all terms used for easy checking. Anyway, its a good tool for stock analysis.
December 8, 2014
A very interesting take on accounting, quite unlike a lot of other accounting books.
But of course, the author finds a needs to quantify growth and such through terms like residual earnings growth.
I like that the book re-enforces the need to be skeptical about accounting
Also has a good take on relying too much on cash flows, and keeping in mind conservative accounting that depresses actual business performance.
It's an easy read for a practitioner and also a brilliant read for a student of value investing.
The last chapter is a good summary of what it takes to be an intelligent investor.
But of course, the author finds a needs to quantify growth and such through terms like residual earnings growth.
I like that the book re-enforces the need to be skeptical about accounting
Also has a good take on relying too much on cash flows, and keeping in mind conservative accounting that depresses actual business performance.
It's an easy read for a practitioner and also a brilliant read for a student of value investing.
The last chapter is a good summary of what it takes to be an intelligent investor.
January 9, 2014
A great read - i mean as great as an accounting book possibly an be… the key message is that good accounting should attempt to report only facts to shareholders/investors and keep away from speculation.
A good investor on the other hand should clearly separate the facts from speculation in their analysis before investing in a company. The approach described in the book for this is simple yet powerful.
Lastly, the book focuses on fundamental analysis for investment and cautions against fair value accounting.
A good investor on the other hand should clearly separate the facts from speculation in their analysis before investing in a company. The approach described in the book for this is simple yet powerful.
Lastly, the book focuses on fundamental analysis for investment and cautions against fair value accounting.
August 25, 2025
This book provides an analysis of valuation from a rigorously technical accounting perspective (which will require dedicated time to study). The author's disaggregation of valuation as book/asset value + growth is a very useful model and Penman dissects accounting quirks which, while not practically useful, are helpful in understanding valuation from an academic and theoretical perspective.
Other reviews accuse this book of being dry, yet I'd argue that the author's literary liberty was constrained by a necessarily dull and pedantic subject matter
Other reviews accuse this book of being dry, yet I'd argue that the author's literary liberty was constrained by a necessarily dull and pedantic subject matter
January 16, 2020
Brilliant novel book by Penman.
This is the perfect book for those wanting a practical, research-based approach to value-investing. Penman has used both finance and accounting principles to teach this. His writing style is full of joy and passion for the subject which is likely to rub off on the reader.
I am on my second read-through and consolidating his ideas further yet it remains incredibly insightful!
This is the perfect book for those wanting a practical, research-based approach to value-investing. Penman has used both finance and accounting principles to teach this. His writing style is full of joy and passion for the subject which is likely to rub off on the reader.
I am on my second read-through and consolidating his ideas further yet it remains incredibly insightful!
February 19, 2013
Great overview of accounting while employing a value mentality
January 8, 2014
Presents a good framework for valuing firms. I like that the author recognized the relevance of DCF and relative valuation models while building the case for residual income style approach.
Read
January 26, 2016Recommended by Prof. Sanjay
Read
June 3, 2018A nice interplay of a single equation on valuation . Amazed at how a whole theory of valuation gets described in a single equation and the same equationncan be interpreted . Requires understanding
Read
February 18, 2019Great book. Read again.
This entire review has been hidden because of spoilers.
Displaying 1 - 28 of 28 reviews