Earnings Quality & Fundamental Analysis

Financial reporting provides a window into the operational and financial workings of a company. However, translating this information into actionable insights is anything but straightforward. It requires an understanding of: Generally Accepted Accounting Principles (GAAP), the quality of financial information, and the adjustments and analyses used to assess profitability, risk, growth, and value. The course starts with a short review of financial reporting and then focuses on various modules of fundamental analysis, including earnings quality analysis, performance evaluation, risk assessment, forecasting, and valuation. The remaining class meetings (approximately 14 out of 24) are devoted to a deeper dive into the reporting and analysis of key transactions (e.g., business combinations, leasing) and financial statement line items (e.g., revenue, income taxes). While the course covers the theoretical underpinning of the various analyses, it focuses on implementation and practical uses. We will study many actual financial disclosures and cases of accounting abuses, and we will conduct fundamental-based valuation and other financial analyses, including using Excel tools that will be provided to the students. Studying financial disclosures will help you better understand the underlying assumptions and accounting choices the firm made in arriving at its accounting numbers. This information can be used to make earnings quality adjustments to the accounting numbers to make them more consistent across time or more comparable across companies. Studying cases of accounting abuses will help you improve your ability to “read between the lines” and develop a set of red flags to look for in analyzing financial statements. The class also incorporates insights from practitioner and academic research. The primary objective of the course is to acquire a deep understanding of accounting information and how to intelligently use it in making investment, credit, and similar resource allocation decisions. Such knowledge is required of investors, consultants, analysts, bankers, executives, and other users of financial information. Warren Buffett nicely explains this in the following video https://www.youtube.com/watch?v=yk6ulqvpLnM. The following are testimonials from past students and other feedback: In a review conducted in 2011, the committee for evaluating elective courses concluded that “this is an excellent, carefully constructed course which provides students with valuable insights and lasting concepts.” In the same year, Professor Nissim won the “Dean’s Award for Teaching Excellence” for developing and teaching this course. Since then, the course has been continuously updated, with a major revision in 2022. The following is a recent email from an alumnus that audited the class: “I really want to Thank You for letting me audit your course. I don’t understand why this is not a mandatory course in the Value Investing program. All of us learn lessons that you are teaching the hard way – by losing money, because no one taught us all this. Every single mistake I made, you covered in the class. It is very important for people in the Value Investing Program to know all this. The capital they lose in their initial years (when they are young and learning all this), if not lost, will make its way into the business school endowment eventually, after compounding. … Thank you for your dedication. You are also the only professor who covered as much material as possible and was really dedicated with the content of the course.” The following is a recent email from a student: “I just wanted to thank you again for the great semester … I loved my internship and I’ve already accepted my offer to return to …. Your class was the best preparation I had for investment banking. All of the normalizing adjustments and deep dives into line items really helped me succeed because several times during the internship I was called on to make considerable accounting adjustments to make companies more comparable for comparison and had I not taken Earnings Quality I would not have been as prepared to handle the assignments. I was better at my job because of your course so I really wanted to express my gratitude for all the time you took creating your presentations and answering questions.”