What Does a Financial Analyst Do?
A Financial Analyst analyses a or project company with the end objective to suggest the management/clients about viable investment decisions. They do a thorough financial analysis and make suitable objective projections to arrive at their conclusions.
We will discuss a common set of duties of the financial analyst –
#1 – Collection of Information & Data
Financial Analyst collects information & data relevant for analysis. Information such as historical financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels., transactional reports from accounting software, information about the movement in stock prices, industry research information, statistical information about the products or services dealt in by the company, macroeconomic information relevant to the company to be analysed. Now, the basic question arises who will provide him with such information? They are required to gather the information from the company itself & Bloomberg or any other government websites wherein such information is available for the general public. The historical financial statements can be extracted free of cost from the website of the Securities & Exchange Commission (SEC).
#2 – Organize the Information in A Structured Manner
Structural organisation of relevant data from various sources is needs for better decision making & usability. Thus, the financial analyst needs to sort the information according to the data received or as per the category. The excel skills of the financial analystSkills Of The Financial AnalystThe skills required for becoming a financial analyst comprises of a combination of technical finance skills and non-technical behavioural skills. The technical skill includes financial modeling, equity research, merger and acquisitions, credit risk modeling, accounting software skills, IFRS knowledge, etc. Non-technical skills include behavioural skills like communication, leadership, interpersonal skills, problem-solving attitude, analytical thinking, etc. help him to organise the better in the least possible time.
#3 – Projections & Forecast
No one knows the future, but still, we do predict & plan for the future. Companies also do the same. They take a base & use assumption to arrive a certain set of projections. In some cases, the client-company itself provides the projections & forecast, and the analyst has to check the same for reasonableness of the projections. It is easy for an analyst to predict the future of the company prospects. This involves the art & science of probabilities. Art & science basically means certain assumption & working on those assumptions.
#4 – Building the Financial Models
A financial model in excelFinancial Model In ExcelFinancial modeling in Excel refers to a tool used for preparing the expected financial statements predicting the company's financial performance in a future period using the assumptions and historical performance information. is the biggest bread & butter for a financial analyst. It is naturally an important area of work for a person working in the sector of investment banking, corporate finance & equity research. The most famous financial models are discounted cash flow analysis (also known as DCF model), Leveraged Buyout model (LBO), Merger & Acquisition model (M&A).
#5 – Analyse the Financial Results
Once the data is organised in the required format, the next job is to analyse the information, various tools such as ratios & metrics. Some of the key ratios used in the analysis are gross profit marginGross Profit MarginGross Profit Margin is the ratio that calculates the profitability of the company after deducting the direct cost of goods sold from the revenue and is expressed as a percentage of sales. It doesn’t include any other expenses into account except the cost of goods sold., operating profit marginOperating Profit MarginOperating Profit Margin is the profitability ratio which is used to determine the percentage of the profit which the company generates from its operations before deducting the taxes and the interest and is calculated by dividing the operating profit of the company by its net sales., net profit marginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization's overall profitability after incurring its interest and tax expenses., the variable cost to sales ratio, debt-equity ratioDebt-equity RatioThe debt to equity ratio is a representation of the company's capital structure that determines the proportion of external liabilities to the shareholders' equity. It helps the investors determine the organization's leverage position and risk level. , return on capital employedReturn On Capital EmployedReturn on Capital Employed (ROCE) is a metric that analyses how effectively a company uses its capital and, as a result, indicates long-term profitability. ROCE=EBIT/Capital Employed., return on equityReturn On EquityReturn on Equity (ROE) represents financial performance of a company. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit., current ratioCurrent RatioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it' short-term loans within a year. Current ratio = current assets/current liabilities , net working capitalNet Working CapitalThe Net Working Capital (NWC) is the difference between the total current assets and total current liabilities. A positive net working capital indicates that a company has a large number of assets, while a negative one indicates that the company has a large number of liabilities., creditors payment period & debtors collection period. Obviously, there are many more ratios & metric which can be used by an analyst for better comfort over the decision making. This is the main area of work. Thus, major time needs to be allotted to this.
#6 – Provide Recommendations
Based on the analysis made, his job is to provide a recommendation. The analysis is not much help if it cannot provide any recommendation. A recommendation may include from an investor perspective or a business perspective. Investor perspective means whether to buy, hold or sell the stock. On the other hand, business perspective means areas of improvement in operations of the entity such as cost reduction techniques, exploring new markets, ideas of becoming a debt-free company, operational efficiencies, etc. A normal analyst easily provides investor perspective recommendation, but only some of the expertise can provide a business perspective recommendation.
#7 – Presenting the Recommendation
After they have prepared with a draft of recommendation, they eventually work out in Microsoft PowerPoint to provide a structured recommendation. Presentation is the selling skill of the financial analyst. The way they present the information recommendation defines their approach to doing work.
#8 – Creating Charts & Graphs
This is an integral part of the presentation. Any financial analysis is incomplete without charts and graphs explaining the various sets of information. Charts & graphs visually help the reader to capture the information in certain lines or bars.
This has been a guide to what does a financial analyst do? Here we discuss duties and schedule (Time- Table) of Financial analyst. You may find more about finance from the following articles –