Abstract: In Ch. 5, it was stated that security analysis is consistent with market efficiency because it interprets the news that reaches the market from firms and other sources. This chapter discusses in more detail how this interpretation is accomplished, drawing mostly on three sources: the economics of industrial organization, data on industry growth, and accounting; most of the examples are from the USA. It begins by examining the implications of market efficiency for the possible returns to be gained from security analysis, and explaining how to analyze the intrinsic value of a corporate equity by taking into account the responsiveness of the company's performance to economic growth, the structure of its industry, and its sources of competitive advantage. It also explains the insights to be gained by proper analysis of a company's financial statements. Finally, it assesses the uses and pitfalls of various shortcuts to security valuation, including the uses of price earnings ratios and Tobin's q ratio.

Keywords: accounting, company finances, competitive advantage, corporate equity, economic growth, equity, industrial growth, industrial organization, industrial structure, market efficiency, price earnings ratios, securities, security analysis, security valuation, Tobin's q ratio, USA,