Three Types of Financial Models You Can Ace With Excel
By Aditi Bhat
Microsoft Excel is a popular program used to create effective financial models. There are various kinds of financial models, but there are certain models in the industry which are exclusively created using Excel. These models are widely used throughout the industry, and if you are new to them, you can learn more about them through an online course or an Excel tutorial.
Now, to give you an idea of how Excel is used in the industry to create financial models, here are three types of financial models you can ace with MS Excel.
1. Company financial models
You might be aware that an Equity Research Analyst evaluates the finances of companies and estimates future earnings, growth, and other investment criteria. These tough and complex decisions are made based on a collection of the company’s models, which are nothing but Excel sheets representing the required data.
Such models are mostly used for breaking down the results in terms of revenue, cost of goods, etc. over a specified period of time, like quarters and years. Most of the times, there is also a second sheet that keeps track of units-sold-and-estimated selling, for small companies and a revenue estimate for large companies. These models can be detailed or fairly simple, but the basic format does not change and all you need is a simple Excel sheet. The only thing that changes is the assumption made by the analyst.
After feeding in the required estimates, the mathematical formulas need to be checked and then you’re done. With this simple model as a base, you can build interconnected models for income statements, cash flow statement and much more.
Picture Courtesy - 1global
2. Valuation models
If you don’t need to make company models, then why not build a valuation model? You can use metrics like price-earnings, price-earnings-growth or EV/EBITDA. If this is not what you need or if you’re looking for something more complex, consider a discounted cash flow model.
Picture Courtesy – busysoftorder
3. Discounted cash flow (DCF)
A discounted cash flow model is used to understand the attractiveness of an investment opportunity. In this model, one row consists of year-by-year cash flow estimates, while rows/columns beneath can represent the growth estimates, discount rate, shares outstanding, and cash/debt balance.
You will also need to have an estimate for one year and add a discount rate, net cash, shares, and debt balance. Now use the Net Present Value (NVP) function in Excel to process your cash flow estimates and discount rate into an estimated NPV. Then you can add or subtract the net cash and debt, and divide it by the shares. You also need to factor in a terminal value.
Picture Courtesy - Financewalk
With these three models, you can achieve a lot and the best part is that you don’t need to invest lots of time and money in it. You can pick up these Excel skills from online training programs and online certification training like those offered by Manipal ProLearn. Sign up and enhance your skills today!