The Interpretation of Financial Statements THE CLASSIC 1937 EDITION BY BENJAMIN GRAHAM AND SPENCER B. MEREDITH INTRODUCTION BY MICHAEL F. PRICE dau - i HarperBusiness A Division of HarperCollinsPublishers‘This book was originally published in 1937 by Harper & Row, Publishers, Inc. ‘THE INTERPRETATION OF FINANCIAL STATEMENTS Copyright © 1937 by Estelle Graham and Spencer B. Meredith. Copyright renewed 1965 by Estelle Graham and Spencer B, Meredith. Introduction copyright © 1998 by Michael F. Price. All rights reserved. Printed in the United States of America, No part of this book may be used or reproduced in any man- ner whatsoever without written permission except in the case of brief quotations embodied in critical articles and review. For information, address HarperCollins Publishers, Inc., 10 East 53rd Street, New York, NY 10022. HarperCollins books may be purchased for educational, business, or sales promotional use. For information please write: Special Markets Department, HarperCollins Publishers, Inc., ro East 53rd Street, New York, NY 10022. First HarperBustness edition published 1998. Library of Congress Cataloging-in-Publication Data Graham, Benjamin. 1894- The interpretation of financial statements : the classic 1937 edition / Benjamin Graham and Spencer B. Meredith ; Introduction by Michael F. Price. — rst HarperBusiness ed. pcm. 0-88730-913-5, 1. Financial statements. I. Meredith, Spencer B. I. Title HG4028.82G72 1998 657.3—Dear 98-1275 98 99 00 or 02 = 10 9 87 6 5 43.21INTRODUCTION In the spring of 1975, shortly after I began my career at Mutual Shares Fund, Max Heine asked me to look at a small brewery—the F&M Schaefer Brewing Company. Tl never forget looking at the balance sheet and seeing a . +/- $40 million net worth and $40 million in “intangi- bles”. I said to Max, “It looks cheap. It’s trading for well below its net worth. ... A classic value stock!” Max said, “Look closer.” I looked in the notes and at the financial statements, but they didn’t reveal where the intangibles figure came from. I called Schaefer’s treasurer and said, “I’m looking at your balance sheet. Tell me, what does the $40 million of intangibles relate to?” He replied, “Don’t you know our jingle, ‘Schaefer is the one beer to have when you're having more than one.’?” That was my first analysis of an intangible asset which, of course, was way overstated, increased book value, and showed higher earnings than were warranted in 1975. All this to keep Schaefer’s stock price higher than it otherwise should have been. We didn’t buy it. How many of today’s jingles are carried on balance sheets? Billions? Or have things changed? Do companies like Coca-Cola, Philip Morris, and Gillette have huge “qntangible” assets that they now leverage worldwide and don't even carry on their balance sheets? This reissue of the classic 1937 edition of Ben Graham and Spencer Meredith’s The Interpretation of Financial