What Is Equity Research, and How Can Financial Modelling Using Excel Help You Become an Equity Research Analyst?
By Afia Ahmad
A rising need for the availability and utilization of information has brought about an industry that was previously nonexistent known as equity research. Equity research basically 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. They 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, but along with it, there are a lot of aspects pertaining to analytics of the various financial metrics of the company. Some of them are:
- Discover the valuation of listed companies
- Analyze various economic aspects such as GDP, industry market value, growth rate and competitive aspects
- Understanding entirely, the economics that surround and back the business
- 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.
Through various facets of industry, from service to manufacturing; most businesses are presently focusing on slowly eliminating human error. When it comes to critical processes, reducing the human element seems to significantly advance efficiency.
Laptops and spreadsheets have eliminated the need for calculators and ledgers.
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 professional in the finance industry.
The image below portrays the tasks of an equity research analyst, along with the importance financial modeling holds.
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.
It is possible presently, to perform lengthy calculations in seconds; which previously would’ve consumed long amounts of time. This includes the inability to completely eradicate human error. The ability to perform such tasks and build such models requires extensive knowledge of the aspects of finance as well as being adept at the functions in excel.
Relevance of financial modeling
Financial modeling is imperative in every sphere of the world of finance. It is significantly critical to every corporate set up. It represents the financial workings 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 would greatly increase chances of having 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 o corporate finance, it is used to comprehend the long-term financial well-being of a company.
2. Private equity and venture capital firms
Because these firms deal with large amounts of money, financial modeling is utilized to estimate the ROI. A range of 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 can be said that Advanced excel training through an excel tutorial would help secure a career in financial modeling, and of course, a world class option is the certification program in Financial Modelling using Excel offered by Manipal ProLearn.