Accounting for Value

by Stephen Penman

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.

266 pages, Kindle Edition

First published December 30, 2010

Reviews

[MADHUKAR DAYAL · Rating 5 out of 5]

This book first provides (through some simple accounting concepts) a deeper understanding of a firm's financial statements (and the jugglery possible within it!) along with real dilemmas of handling certain real World accountable incidents or events which do not lend themselves to easy accounting language transformation. For an investor, it is a very valuable source of learning the correct interpretation of the financial statements, and to become aware of what could be hidden in the their footnotes.
A must read for serious investors (though not to be taken as a be-all and end-all book on investing)!

[Andrew · Rating 4 out of 5]

It's good book for starters - providing some framework but lacking sophisticated practical contexts.