Skills required for Equity Research
It has been seven years since I left my research analyst job at CLSA India. I co-founded eduCBA to train students on Investment Banking & Equity Research. Since then, we have trained more than 10,000 students on different research topics. However, each time we see the same set of questions, one common question is, “What are the Top Equity Research skills that one should acquire to be successful in Research.”
Here are the top 5 Equity Research Skills –
- Excel Skills
- Financial Modeling
- Accounting SkillsAccounting SkillsAccounting Skills are the set of skills required to present business transactions comprising of financial and non-financial in the books of accounts as per prescribed Standards of Accounting (US GAAP, IFRS, Ind AS) and as a part of legal compliance and analysis of business outcome in an optimum way.read more
- Valuations
- Writing Skills
Let us discuss each one of them in detail –
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Source: Equity Research Skills (wallstreetmojo.com)
#5 – Writing Skills
Writing Skills is at number #5. The equity research report is the most important communication from a securities firm to its clients. This report has a particular purpose; i.e., it is intended to help an investor make a decision about the allocation of resources.
- First thing First – One crucial aspect is that the research report is nowhere close to novels from Dan Brown, wherein the best is saved for the last!. In a research report, the stock target and price recommendations come first.
- KISS Principle – “Keep it Simple Silly” is the golden rule. It is essential to be to the point and precise.
- Less is More – Another essential aspect to note here is that you are not required to write a full Ph.D. thesis here; a single page note or a couple of pages of reports would be great. Readers hardly have 1-2 minutes to read your full report. They may not even scan till the 2nd page.
#4 – Accounting Skills (More than Numbers!)
Number#4 is Accounting! Accounting here is not about Debits and Credits. It is much more than that.
- Be proficient in Financial Statement Analysis – The keyword here is Financial Statement Analysis. It means you are expected to be proficient in vertical analysis, horizontal analysis, ratio analysis, cash conversion cyclesCash Conversion CyclesThe Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation.read more, ROEs, ROCEs, etc.
- Sourcing of Right Data – Another aspect where I see many challenges is sourcing the right data. For example, if you require an Annual Report of a companyAnnual Report Of A CompanyAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more, would you visit the company’s website or SEC website. Besides, which other documents will you refer to draw your conclusions. Typical key sources to look for information are the Press Releases, Conference Calls, SEC FilingsSEC FilingsSEC filings are formal documents submitted to the Securities and Exchange Commission in the United States that contain financial information about the company as well as any other relevant information about recent or upcoming activities.read more, etc. Financial Statement Analysis done on the wrong set of numbers will lead to results that will mislead the analysis. Hence, as an analyst, the primary challenge is to fetch the right data.
- “Identify the Shenanigans” – Our main focus in Analyst specific Accounting is to identify and predict the accounting malpractices by companies. These are normally hidden away. You can see below the confessions in Satyam Fraud Case
#3 – Valuations (Lies in the eyes of the beholder!)
Valuation Skills is at Number #3. Equity Valuation is the process of estimating the potential market value of a financial assetFinancial AssetFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more or liability. Valuations are required in many contexts, including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and litigation. You should be aware of the following –
- Intrinsic Valuation methods – Intrinsic Valuation Method (DCF) which means primarily determines the value by estimating the expected future earnings from owning the asset discounted to their present value
- Extrinsic Valuation Method – Relative value models determine the value based on the market prices of similar assets. It includes valuation ratios like PE RatioPE RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more, P/CF, P/BVP/BVPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share read more, and many more.
- The Key is to identify the right valuation methodology – There are more than 15 valuations approaches, including DCF, Enterprise Valuation MethodsValuation MethodsDiscounted cash flow, comparable company analysis, comparable transaction comps, asset valuation, and sum of parts are the five methods for valuing a company.read more, and Equity Valuation Methods. The vital thing to know is why a particular valuation Methodology is used in a specific sector. For example, Banks are valued using Price/Book Value; however, other sectors may not use Price/Book Value as a key valuation metric.
#2 – Financial Modeling (Cliffhanger!)
At number #2 is Financial Modeling. Financial modeling meansFinancial Modeling MeansFinancial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact.read more forecasting the future of the company or an asset by way of an Excel Model that is easy to understand and perform scenario analysis. In the context of our discussion here, Excel-based Financial Modeling includes professionally forecasting future financial statements like Income Statements, Balance Sheets & Cash Flows. Unfortunately, in graduation and post-graduation, every other subject is taught except Financial Modeling and Excel.
- Financial Modeling follows Modular Approach – The primary approach taken is Modular one. The modular approach essentially means that we build core statements like Income Statement, Balance SheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more, and Cash Flows using different modules/schedules.
- Provide Additional Schedules for clarity – The additional schedules are the depreciation schedule, working capital schedule, intangibles schedule, shareholder’s equity schedule, other long term items schedule, debt schedule, etc. The additional schedules are linked to the core statements upon their completion.
- Free Financial Modeling Training – If you want to learn Financial Modeling from grounds-up, you can refer to the Free Financial Modeling Course. Please note that Financial Modeling skills may not be very easy to acquire. It requires time and patience to master this skill set.
#1 – Excel Skills (Most Obvious is Most Dangerous!)
At number #1 is the Microsoft Excel Skills! Neither I am joking, nor am I drunk. Equity Research AnalystEquity Research AnalystAn equity research analyst is a qualified professional who interprets financial information and trends of an organization or industry to provide recommendations, opinions, reports, and projections on the corporate stocks to facilitate equity trading.read more spend around 10-12-14-16 hours each day working on excel doing financial modeling, valuations, and financial statement analysis. Important points to note in Excel are
- Formatting is most important– An analyst needs to produce an output that is error-free and neat. There is a lot of money riding on the research reports published by the analyst,s and the last thing one needs is to lose a client due to loosely formatted tables and excel models.
- Speed & Accuracy – Timely delivery of reports, models are required in Equity Research Industry. MS Excel is the only place I can say where there are “Shortcuts to Success”! I have hardly seen research using a mouse, and the majority of them are masters in Excel.
- Analysis – One should be able to use Excel tools like Pivot, Filter, Sort, VLOOKUP in ExcelVLOOKUP In ExcelThe VLOOKUP excel function searches for a particular value and returns a corresponding match based on a unique identifier. A unique identifier is uniquely associated with all the records of the database. For instance, employee ID, student roll number, customer contact number, seller email address are unique identifiers.read more, HLOOKUP FunctionHLOOKUP FunctionHlookup is a referencing worksheet function that finds and matches the value from a row rather than a column using a reference. Hlookup stands for horizontal lookup, in which we search for data in rows horizontally.read more, etc. to analyze complex data and client requests.
- Scenario Building – It is important to create different scenarios for Modeling like Optimistic, Pessimistic, and Most expected. Also, your client may want to change a few assumptions to see how they affect the target price, find terminal valueFind Terminal ValueTerminal Value is the value of a project at a stage beyond which it's present value cannot be calculated. This value is the permanent value from there onwards. read more, capm betaCapm BetaCAPM Beta is an essential theoretical measure of how a single stock moves with respect to the market. In this method, we determine the cost of equity by summing up the beta and risk premium product with the risk-free rate.read more, etc. Hence, you need to be well aware of Data Tables, Goal Seek in ExcelGoal Seek In ExcelThe Goal Seek in excel is a “what-if-analysis” tool that calculates the value of the input cell (variable) to the desired outcome. In simple words, the tool helps answer the question, “what should be the value of the input in order to attain the given output?”read more, etc. to provide these features to your clients.
- Graphs & Charts – A picture speaks more than a thousand words! You will find the majority of the research reports contain neat and informative investment banking graphs and chartsInvestment Banking Graphs And ChartsThe top 4 investment banking charts an investment banking firm must be aware of while creating excellent financial and valuation models and its analysis include PE chart, PE band chart, football field graph and scenario graph. read more and less of written material. You should try and master this data representation technique.
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This article has been a guide to Equity Research Skills. If you learned something new or enjoyed the post, please leave a comment below. Let me know what you think. Many thanks, and take care. Happy Learning!
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Wow I normally read and your posts but I have really liked this one, great and informative. Actually am doing a course in banking and investment management – Uganda. I am so much interested in financial modeling and Excel program to help me get more skills for equity analyst and research.
Thanks
Hi Dhiraj,
You are doing a tremendous job via this blog as it is quite informative.
I am a Chartered Accountant and want to explore opportunities in the areas of Equity Research and Investment Banking. Further, I am pursuing CFA USA as well. So just wanted to know which certification apart from CFA Course I should pursue to land a job in these areas. I just came to know about Financial Modelling certification as well offered by many institutes. Does this includes Equity Research?
Hi Nikhil, CA + CFA is an awesome combination. Additionally, you can gain training in practical applications of Investment Banking and Equity Research. Financial modeling may or may not contain Equity Research as the scope of Financial Modeling varies with Institute. If you wish to do online trainings, then we also offer such courses. Here is a link to Investment Banking Training (this includes Financial modeling)
hello, is the equity research training also included in the investment banking training course. thank you
Yes, it is included in the investment banking course.
Nice article Dhiraj. I enjoyed reading it.
Thanks Gowtham!
Hi Dhiraj,
I am shrikant ex banker , served in credits in analysing balance sheets and preparing project reports for ccs/TL’s and side by side I develop passion about cap market, interested in pursuing financial modelling. Kindly communicate which is good course for me and its prospectus.
regards,
shrikant
Very informative for aspirants in Financial and Business Performance Analysis …Cheers
its a very useful information and i wanna to know more abut courses that i should pursue in financial carrier as sir am actually a student of 2nd year. am waiting eagerly for ur reply.
Thanks Deepak for the note. You should look at developing 2 skills primarily, a) financial Modeling b) excel. You can take any course on this. Infact, on this website there is a free step by step tutorial on financial modeling as well.
Hope this helps,
Dheeraj
Is this free financial modeling course enough to make me able to get the thorough knowledge of it.
Hello Savi,
this free financial modeling course is actually good enough to get knowledge on financial modeling. However, it is upto you to take your learnings ahead by applying the financial modeling methodologies learnt to other set of companies. More you practice, better you will become.
All the very best,
Dheeraj
Thank you very much, Dheeraj
Your article will guide me to be a good equity analyst :)
Greetings from Jakarta
thanks Mohamad!
Hello Sir,
I am a first year MBA Student and have cracked Equity Research analyst internship in an investment bank. I currently read Bloomberg Business, Business Today and Mint Newspaper everyday. Sir, I request you if you can guide me on other sources of data I should be reading apart from these 3 sources of data to get information that is beyond between the lines.
Awaiting for your reply.
Thank You.
wow. Congratulations Raj. You are doing great! I think if you wish to do really well as an intern, learn Financial Modeling in Excel and valuations
Hope this helps.
Dheeraj
It would be great if you could upload the financial model as well.
Thanks Dheeraj,
each and every time i learn new things with the help of your articles…
Thanks Mahendra, I am glad you find these articles helpful.
Very usefull post as always. Dheeraj thanks for sharing so usefull subject with the rest of us. If you do not mind I tweet your posts and I share them with various groups at linkedin.
BR
Michael
Many Thanks Michael! I really appreciate your help in sharing these posts in your group.
Best,
Dheeraj
Thanks Rafael. I would like a specific example let’s say a simple “Balance Sheet”, “Income statement” Cash Flow” to build in Excel financial model with graphics.
Nice article. Very informative.
Many Thanks Vanshja!
Great Article!!! Enjoyed project finance classes in educba.
Thanks Hari!
Great post! Excelent read for students who are willing to pursue a career in equity research.
Thanks Rafael :-)
Thanks for the information.
Thanks Nitesh!
Content was very much useful. Thanks for the information.
Thanks Deepak!
Very good article. Please suggest some courses..
This is some real good advice thanks alot. But is it possible to value a company without accounting skills and rather using mathematical techniques.
Thanks Dheeraj. This was an eye opener. I always overlooked Excel, maybe it is high time for me to focus on MS Excel. Any startup training that you recommend for excel?
Many thanks Angela.
Hello Dear,
I read your article and I’m really interested in FCA. Could you tell me how i study, what do i do need at first of all. I hope that you will help me.
See you soon.