How Financial Modeling Using Excel Can Help with Equity Research

A rising need for the availability and utilization of information has brought about an industry that was previously non-existent. Yes, we are talking about equity research. Equity research involves the analysis of the entirety of a company’s financials. Furthermore, it involves the performance of ratio analysis, forecasting financials, and exploring various scenarios that lead to a valid recommendation when it comes to stock investments.

What does an equity research analyst do?

An equity research analyst primarily analyses financials while focusing on quantitative and qualitative facets. These professionals study the gross financial history of a company and its economic standing to eventually help investors make an informed decision. This extensively researched information is then consolidated and presented in an equity research report.

Aspects of equity research

 

• There are various aspects of equity research. Of course, performing financial modelling is a major element of equity research. However, there are a lot of aspects pertaining to analytics of the various financial metrics of the company. Some of them are:
• Discovering the valuation of listed companies 
• Analyzing various economic aspects such as GDP, industry market value, growth rate and competitive aspects
• Understanding the economics that surround and back the business entirely
• Calculation of fair price using discounted cash flows and relative valuations
• Recommendation to buy or sell depending on overvaluation or undervaluation 
• Conducting a financial statement analysis to discover the company’s financial performance in the past
• Analyzing historical balance sheets, income statements, and cash flow
• Usage of equity valuation models

 

Equity research and financial modeling

In today’s corporate arena, automation is not only pertinent but necessary. Most businesses are presently focusing on eliminating human error slowly through various facets of the industry, right from service to manufacturing. When it comes to critical processes, reducing the human element seems to significantly advance efficiency. 

Remember the time when calculators and ledgers were an indispensable part of finance? Today they are replaced by laptops and spreadsheets. Pursuing a career in finance would involve an extensive know-how of the industry’s workings, recent trends and the usage of automation for daily activities as a finance professional.

The image below portrays the tasks of an equity research analyst, along with the importance of financial modeling:

 

Source: LinkedIn

What is financial modeling?

Financial modeling involves the methodical formation of a logical structure used to analyze data. This is done for the purpose of arriving at conclusively valid financial decisions and logical conclusions.

Presently, it is possible to perform lengthy calculations in seconds, which was time-consuming previously. The ability to perform such tasks and build such models requires extensive knowledge of different financial finance apart from expertise in Excel. 

Relevance of financial modeling

Financial modeling is imperative in every sphere of the financial world. It is significantly critical to every corporate set up. It represents the financial operations of a corporate entity while enabling ideas through cost-effective estimation. It aids in creating an attractive representation of the economic performance of an organization. Learning Excel can greatly increase your chances of building a career in finance. There are plenty of online courses and professional courses that would help as an extensive MS Excel tutorial.

Who uses financial modeling?

1. Investment banks

When it comes to mergers and acquisitions, financial modeling is an extremely effective tool that helps estimate the viability of a certain deal. In the world of corporate finance, it is used to comprehend the long-term financial well-being of a company.

2. Private equity and venture capital firms

As these firms deal with large amounts of money, financial modeling is utilized to estimate the ROI. Several functions in Excel help identify and determine the return on investment for different amounts. 

3. Equity research firms

An equity research analyst needs to showcase unbiased views of various financial instruments. While the ‘sell’ side analysts are typically hired by investment banks to make recommendations and valid estimations, ‘buy’ side analysts are hired by private equity funds or hedge funds.

In either case, financial modeling is used to determine a company’s economic growth and future. It won’t be wrong to say that advanced Excel training through an Excel tutorial can help secure a career in financial modeling. If you are considering a career in finance or want to hone your Excel skills, check out the certification program in Financial Modelling using Excel offered by Manipal ProLearn.