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 statements, 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 analyst help him to organise the better in the least possible time.
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#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 excel 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 margin, operating profit margin, net profit margin, the variable cost to sales ratio, debt-equity ratio, return on capital employed, return on equity, current ratio, net working capital, 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.
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