Introduction to Accounting for Investment Analysis


I attended this half-day course in the morning of February 22nd in Central London. While I thought that I had a reasonable working knowledge of standard accounts it soon became obvious that I’ve barely been scratching the surface. There is just so much valuable information tucked away in the annual report that gets overlooked either because no one finds it or they don’t realise that it’s significant.

Now this is no beginner’s course. It’s pretty intense and if you don’t know your way around a set of accounts you’ll definitely struggle to keep up with the material. But if, like me, you have some understanding of how all the different sections (income, assets, cash) are laid out and relate to each other then you’ll have no problem keeping up. For me the main takeaway is that I now have a much longer checklist of numbers to examine along with a better understanding of what the trends in these numbers are actually telling me.

While on the course I made as many notes as I could as there’s too much to take in on the day. From these I’ve extracted the major points to try and provide a flavour of the material. In reality Steve covers a lot more content than these headlines suggest and I’m sure that he’s happy to answer any questions.

The structure of this course is available here and I’ve used this to lay out a selection of interesting points which came up on the day:

Report and Accounts - how to approach the accounts

Read the accounts from the back
Read the Contingencies note
Read the Audit report

Balance Sheet - this is where an understanding of a company starts

Look at the big numbers first
Current assets – check the provisions!
Working capital ratios are the most important thing to look at in the BS

Income Statement - principal features, what's important

Employees - consider total count and sales per employee
Low tax rate may indicate that profits aren’t real since tax man has a different view
Adjusted earnings are very subjective – what is the FD excluding?

Cash Flow - how cash is generated and how it ties back to the other statements

Are there fixed asset sales? For less than book value?
Compare change in net debt to change in cash
Operating cash-flow and other lines can be fiddled by moving items around

Accounting Policies

Revenue recognition – compare wording to previous year
Think about which areas are critical to the company – what’s material in the accounts
If policy text is overly complex then that’s a red flag!

NB Any errors and omissions in this summary are mine alone.

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