Financial Modeling - Part 1

Financial Modeling

Financial Modeling is the most important tool for any guy in the field of Finance. It is used to deal with the various aspect of the company.

I must assume that you all heard about "MS Excel"? Right?

So basically Financial Modeling is done in MS Excel. They (financial analyst) use a different tool to build a financial model. It is basically a model which is used to forecast the performance of the company in various aspect of the company. It shows an overview of the company overall cost and revenues.

Financial Executive use a financial model to take basic decisions regarding the working of the company or various investment decision related to the expansion of the company.

Use of Financial Model:

Now you must be wondering what is the use of making a Financial Model? so, below are some of the uses of Financial Model in every company:

• Forecasting.
• Decision-Making Tool.
• Summary of Cost.
• Summary of Incomes.
• Valuation of the Company.
• Calculation of Unquoted Equity Shares.
• Equity Research.

This is some important and basic use of the financial model in any company.
This is the most important tool for Equity Research (for equity Research, visit my blog nayanparihar96.blogspot.com).

How Financial Model look like?

This below picture shows the basic financial model from scratch that I have made for a company:

Three Statement Financial Model by Nayan Parihar

Types of Financial Model

There are the different type of Financial Model made depending on the type of working. Some of the basic Financial models that I have heard are:

1. Three Statement Model.

2. Comp Analysis Model.

3. DCF Model.

4. Leveraged Buyout Models.

5. M&A Model (Merger and Aquisition Model).

6. IPO Model

7. Budget Model.

Financial Modeling is not only limited to this, but there are also various types of model in which company need to make for taking a decision.

Financial Analyst and Executive use various assumptions regarding various cost elements or revenue elements to be forecasted. This assumption needs to be taken on a logical basis. There are also various methods for an assumption. When I was making a financial model during my internship, I use Average method to assume or forecast different items. You can take an average of past 2 years and can assume that this average rate will be considered for next 5 years (Projection is basically done for 5 years) but it is only done when the company doesn't give us the projection for some items.

So it basically depends upon the Knowledge of the analyst or the executive regarding taking the logical assumption. But remember, Projection is not always right. There are different types of "Risk"

involve in it.

This is all about a basic of Financial Modeling.

I will also be posting more content on the financial model like:

• How to make?
• Assumptions?
• Valuation Working?

and many other aspects which I will be covering in my next blog.

For queries and suggestion, mail me at: nayanparihar96699@gmail.com

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Equity Research - A beginners module.

Equity Research- A beginners Module.

Points to be covered:

1. What is Equity Research?

2. The process of Equity Research? 
3. Role of Equity Researcher?

4. Hierarchy of Equity Research? 
5. Buy and Sell Side?

What is Equity Research? 

Equity research is the in-depth study of the companies financial data which is done by the equity researcher to analyze the company and give its view on "Buy/Sell" of the companies stock in the market. 

This includes:

1. Performing the valuation of the company.

2. Analysis of the business environment.

3. Projections of the companies revenue and expenses.

All the workings of the equity researcher are to be shown in his or her Equity Research Report.

This report Contains the view of the researcher for a particular company or on a stock of a particular company.

The process of Equity Research:

There is no such well-defined process of equity research. I tried to analyze one particular trend that every equity researcher use. Follow the following steps:

1. Economic Analysis: Do the proper economics analysis like GDP, industrial rates, etc.

2. Financial Statement Analysis: After doing the economic analysis, analyze the financial statement of the company.

3. Financial Projections: On the basis of your analysis of GDP, market size, trends, and growth, then do the financial projections of the company to help you in your financial modeling and finding the valuation of the company.

4. Methods: Use different Methods for the valuation of the company like DCF, Companalysis. (For valuation Basics read my blog "Valuation" "nayanparihar96.blogspot.com")

5. Calculate the Fair Value and the Market Value of the company.

6. Then go for the Final Check: if the Fair value < Market Value , then "Sell" the stock.

7. if the Fair value > Market Value , then "Buy" the stock.

After these basic steps, you will be able to draw your equity report stating the Buying and Selling of the Stock of the particular company.

Role of Equity Research:

1. There are buyers and sellers available in the market, so it helps both of them by filling the information gap.

2. It takes lots of time and energy in making an equity research report.

3. It shows the position of the company in the market. 

4. The main aim is to make a profit from the stock.

5. Help the investors or the company to understand the financials of the company or the stock of that company.

Hierarchy of Equity Research:

The typical hierarchy of equity research in any organization:

1. Head of Equity Research.

2. Senior Analyst.

3. Associates.

4. Junior Analyst.

Skills Set Required:

There are many skills that one should have if he or she wants to become an Equity researcher. Following are the skills which I have noticed are:

1. Writing Skills: To write the final Equity research Report.

2. Analysis Skills: To analyze the Financial Statement.

3. Projection Skills: To project the Financial Statement.

4. Excel Skills: A Pro excel skill is required.

5. Reading Skills: To read previous available reports and draw a conclusion from that.

6. Financial Modeling: This is the most important Skills that is required. One should be certified in Financial Modeling.

Sell Side and Buy Side:

Sell Side: It is generally known as the firm who continuously have an eye on the performance of a particular stock and who make the equity research report which is needed by the investors who need to take decisions regarding Buying, holding and Selling of the stock.

Includes:

1. Equity Research Firm

2. Investment Banking

3. Merchant Banking

4. Market Maker.

5. Equity Broker.

Buy Side: It is the Firm or an investor who generally buys the Research Report from the sell side firm to make the decision of investment in a particular firm or a particular stock of the company.

Includes:

1. Asset Management Company

2. Mutual Funds

3. Insurance Company

4. Retail Institutional Investors.

5. Qualified Institutional Investors.

(For QIB and RII please refer to my blog titled as "IPO's in India" for more information on QIB and RII)