What Does a Financial Analyst Do?

What Does A Financial Analyst Do?

A financial analyst analyzes a project or a company to suggest viable investment decisions to the management/clients. They do a thorough financial analysis and make suitable objective projections to arrive at their conclusions.

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Financial analysts are there in a company, a bank, a hospital, insurance companies, and many other businesses that involve huge transactional activities and deal with keeping huge financial details. A little mistake in maintaining records and strategizing finances could lead to adverse effects. Hence, relevant skills and the best possible knowledge in the subject are what build an efficient financial analyst.

Roles & Responsibilities

#1 – Collection of Information & Data

Financial analyst collects information and data relevant for analysis. In addition, they analyze 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.read more, transactional reports from accounting software, information about the movement in stock prices, industry research information, statistical information about the company’s products or services, and macroeconomic information relevant to the company. The fundamental question arises, who will provide him with such information? They must gather the data from the company itself and Bloomberg or any other government websites wherein such information is available to the general public. One can extract historical financial statements from the Securities and Exchange Commission (SEC) website.

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#2 – Organize the Information in a Structured Manner

It needs the structural organization of relevant data from various sources for better decision-making and usability. Thus, the financial analyst must sort the information according to the data received or the category. The Excel skills of the financial analyst Skills 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.read more help him to organize the better in the least possible time.

#3 – Projections & Forecast

No one knows the future, but we still predict and plan for the future. Companies also do the same. They take a base and use assumptions to arrive at certain projections. Sometimes, the client company provides the points and forecast. Then, the analyst checks the projections’ reasonableness. It is easy for an analyst to predict the future of the company’s prospects. It involves the art and science of probabilities. Art and science mean certain assumptions and 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.read more is the biggest bread and butter for a financial analyst. So, it is an important work area for someone in investment banking, corporate finance, and equity research. The most famous financial models are Discounted Cash Flow Analysis Discounted Cash Flow AnalysisDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance.read more (also known as the DCF model), Leveraged Buyout model (LBOLBOLBO (Leveraged Buyout) analysis helps in determining the maximum value that a financial buyer could pay for the target company and the amount of debt that needs to be raised along with financial considerations like the present and future free cash flows of the target company, equity investors required hurdle rates and interest rates, financing structure and banking agreements that lenders require.read more), and Merger & Acquisition model (M&A).

#5 – Analyse the Financial Results

Once one organizes the data in the required format, the next job analyzes various ratios and metrics tools. 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.read more, 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.read more, net profit margin Net 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.read more, 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. read more, return on capital employed Return 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.read more, 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.read more, 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 read more, 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.read more, creditors payment period and debtors collection period. There are many more ratios and metrics which an analyst can use for better comfort in decision-making. That is the main area of work, and hence it needs sufficient time allocation.

#6 – Provide Recommendations

Based on the analysis made, his job is to provide a recommendation. The research is not much help if it cannot give any suggestions. For example, a proposal may include an investor or business perspective. Investor perspective means whether to buy, hold or sell the stock. On the other hand, a business perspective means areas of improvement in the operations of the entity. Such areas include cost reduction techniques, exploring new markets, ideas of becoming a debt-free company, operational efficiencies, etc. A normal analyst easily provides investor perspective recommendations, but only some experts can recommend a business perspective.

#7 – Presenting the Recommendation

After preparing a draft of the recommendation, they eventually worked it out in Microsoft PowerPoint to provide structured guidance. Presentation is the selling skill of a financial analyst. The way they present the information recommendation defines their approach to doing work.

#8 – Creating Charts & Graphs

It is an integral part of the presentation. Any financial analysis is incomplete without charts and graphs explaining the various sets of information. Charts and graphs help the reader capture the data in certain lines or bars.

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This article is a guide to guide to What Does a Financial Analyst Do. We explain their roles or responsibilities from collecting data to presenting them. You may find more about finance in the following articles: –

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