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Tag: Financial Analysis

What is Quantitative Easing?

Posted on by Imarticus Learning

Quantitative easing is an innovative and a non-conventional tool adopted by central banks to increase the money supply in the economy when traditional monetary policies fail to stimulate growth. The Central bank buys long-term fixed income bonds from commercial banks and other private institutions which increases the money supply and reduces the interest yield on these bonds.

This is different from the traditional monetary policy of buying or selling short-term government securities in order to keep interbank interest rates at a specified target value.

Quantitative easing is possible only if the central bank controls the currency.

For example, the US can implement quantitative easing because the Federal Reserve controls the supply of dollars. However, the central banks of countries in the Eurozone cannot unilaterally expand their money supply and thus, cannot employ quantitative easing. They will have to rely on the European monetary union (European Central Bank).
The central bank prints money (or creates money electronically nowadays) to buy bonds. The money supply with commercial banks increases as the central bank keeps buying bonds. Commercial banks can use proceeds from the sale of bonds to lend it to companies and individuals. As money reserves with banks increase, the lending rate on loans falls, making cheap credit available to businesses and individuals. Companies can use these funds to invest in their business and individuals can use them for spending it on goods and services. The increase in investments and spending will improve the money supply in the economy.

As the money supply improves and the economy gets back on track, the Central Bank can sell these bonds and destroy the cash received from it.

Quantitative easing can be used to keep inflation rate on track. However, this policy will fail if banks are reluctant to lend additional funds or if individuals and businesses are not willing to spend or invest their surplus funds.

Quantitative easing was tried first by a central bank in Japan to get it out of a period of deflation in the late 1990s.

From 2008 onwards, it was used by the US and the European Union because their risk-free short-term nominal interest rates were either at or close to zero. In the United States, this interest rate is the fund’s rate; in the United Kingdom, it is the official bank rate. In 2008, the Federal Reserve started the first round of quantitative easing (QE1). In November 2010, the Fed announced a second round of quantitative easing (QE2), buying $600 billion of Treasury securities by the end of the second quarter of 2011. The third round of quantitative easing, “QE3”, was announced in September 2012. The Federal Reserve decided to launch a new $40 billion per month, open-ended bond purchasing program of agency mortgage-backed securities. Because of its open-ended nature, QE3 has earned the popular nickname of QE-Infinity. In December 2012, The Federal Reserve announced an increase in the number of open-ended purchases from $40 billion to $85 billion per month.

About The Author

Asif is a student of Imarticus’ IFAP program. The Imarticus IFAP program, one of our finance courses, saw Pratik Biyani talk about Quantitative Easing last week. It was extremely well received and we requested one of our students, Asif Masani, to summarise his takeaways. When asked about his experience at Imarticus, Asif responds that he loves Imarticus because, “I really like the innovative learning techniques used at Imarticus like learning through case studies, movies, discussions etc. Also, I love the various guest lectures which are arranged by the Institute where we can interact and ask questions to the various professionals and gain from their rich industry knowledge and experience.”
He says, “I enjoy travelling, visiting new places which I did all 4 years while working on various outstation audit assignments. I love cycling, and I often go for long trips on my bicycle on weekends. I enjoy watching movies, especially action, adventure and science fictions. Also, I like watching football and cricket.”
When asked about his favourite books, he says, “I really haven’t read a lot of non-fiction books.  But thanks to Reshma and Pradeep (at Imarticus), I have made a start with Seven habits and the Barbarians at the Gate.”

What Are The Careers in Financial Analysis?

Posted on by Imarticus Learning

As with every key skill, Financial Analysis opens many doors be it a financial controller on the Buy Side or an Investment Banker on the sell side.
Here are the top five career paths for a financial analyst.

Private Equity Analyst

A private equity analyst works on the buy side and for a private equity fund like Chrys Capital or Warburg Pincus. Their job involves analysing the financials of private companies, creating financial models and forecasts of their operations including industry, macroeconomic and microeconomic and preparing a case for or against investment in the company. He/she liaisons with key senior representatives of the company, often including the MD, investment bankers and the Investment Committee of the fund.

Investment Banking Analyst

An investment banking analyst works for the sell-side, investment banking, and is in charge of analysing both companies and sectors and preparing pitch presentations, financial models, forecasts, financial analysis of companies for valuation and of course information memorandums which are part of the collateral used in deals. The analyst often liaisons with clients, companies, senior management, private equity analysts and many others in the financial services landscape.

Equity Research Analyst

This is a financial analyst that can either work for an investment bank, (sell side) or for a mutual fund. The equity research analyst usually covers five to six companies in a sector and analyses these companies in the great amount of detail. They are experts in the industry they cover and give recommendations like buy, sell and hold in written reports. Primarily liaisons with senior representatives of the company, including the CEO and CFO, as well as investors who read the reports.

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Financial Controller

Often works in a company and reports to the CFO of the firm. His responsibilities involve ensuring the finances of the company are sound, analysing the performance of the company and making sure budgets are in place and are adhered to. He ensures funding requirements of the company, both working capital and long-term financial, are made available in a timely manner. He engages with both commercial and corporate banks for treasury requirements and needs to have a broad knowledge of all financial products including derivatives like options and futures to hedge foreign exchange risk and make effective investments, capital markets, mutual funds, and the commodity market. In many ways being a financial controller or treasurer is an excellent way to begin a career in the financial analysis since it allows a person to have a bird’s eye view of the financial services products while engaging in M&A on behalf of the company, as well as getting much-required exposure to how companies actually work. from the inside. This is often touted as the biggest disadvantage investment bankers and private equity analysts have because they often join these firms as freshers and have little idea of how companies actually make money.

Commercial Banker

Working as a corporate banker is a role that is often a role completely ignored because it is considered unglamorous but in many ways, it is the most obvious path to becoming the next Chandha Kochar or KV Kamath. Corporate bankers often walk the fine line between investment and commercial banks and because of that get access to many areas of banking that are often closed to Investment Bankers and Private equity analysts. They are comfortable with Asset Management and Treasury, have keen insight into the ways companies work and often find their way into project finance which is easily one of the most exciting places to work in a bank because they lend to high profile infrastructure projects that require intense financial analysis.

Also Read: What are the Uses of Financial Analysis

CFA Certification Provides A Gateway To Million Possibilities

Posted on by Imarticus Learning

In the world of Finance, the CFA certification or the Chartered Financial Analyst certification is a very well-known and prestigious certificate to hold. Those who are able to crack these exams, are popularly known as Charter Holders and become a part of the exclusive organizations and are able to get entry, without any prior entrance examinations. Apart from the exemplary job opportunities, there are amazing salaries that are offered to the professionals, who crack all three levels of this examination. Due to the fact that even a working professional can attempt to give this examination, as well as the considerable affordability of it, have resulted into a lot of people opting to attempt the same.
Through a CFA certification, a candidate can find a means to not only boost their management skills, but also ace investment analysis. This examination usually helps a candidate, cover industry practices, which include both ethical as well as professional standards in addition to academic theories. Anyone who is looking to take a shot at cracking the three levels of this examination has to well versed with a number of concepts like, Quantitative methods, Economics, Financial Analysis, Portfolio Management, Equity, Fixed Income, Derivatives, Alternate Investments and so on. The three levels of this examination, are devised in such a way as to inculcate the aforementioned concepts, in a better way. For a CFA holder, the gates in terms of job opportunities are wide open, for they can choose from a number of fields like research, analysis, accountancy, corporate finance, consultancy and relationship management; as the field of their expertise.

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Apart from the rewarding job prospective, this exam ensures that a charter holder is able to cultivate broad knowledge in terms of investment skills as well as decision-making tendencies, up to the quality of the global financial industry. As the program and the examination, both are entirely based on finance, they encourage a candidate to shine really well through a career in Investment Banking. If and when a candidate chooses a program, to help and assist them in cracking this prestigious exam, these programs are generally dependent on extensive global practice analysis processes, which are basically dependent upon inputs, discussions, surveys as well as reviews, which are all curated from esteemed CFA charter holders.
The CFA program has already been at the receiving end of a number of accolades, including that of the best course, which goes on to provide a great amount of quality, in a profession like Investment Banking. Being a charter holder, not only opens up a million, lucrative possibilities but also ensures that the recipients are well equipped to be on a sub-par level when it comes to skills required for Investment Analysis worldwide.

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5 Myths About Financial Analysts

Posted on by Imarticus Learning

The field of finance has seen rapid growth prospects, both in times of economic boom and turmoil. It is fast becoming a sought after field in India as well. The careers of Investment Banking and Financial Analysis are seen as extremely blue blooded career. The professionals in these respective fields seem to have formed an impenetrable clique around themselves, making the professions seem difficult to get into.  Financial Analysis is one such profession which is considered to not be suitable for the faint-hearted. There are a lot of myths around this high profile career, which is why a lot of people shy away from them. Here are 5 of those myths, decoded.

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One Needs To Have A Degree In Finance To Become A Financial Analyst
Financial Analysis is a type of analysis and it not necessary to have a prior degree or specialization. Although, if one does have a degree in finance, it becomes useful to apply it in the various other aspects of the field. As financial analysts are supposed to study the current fiscal situations and state of the market, there are only a handful of technical terms and aspects that can be understood in spite of not having a degree in Finance.
You Have to Have Prior Connections to Get Into This Field.
While it is always better to know people in places, it clearly does not mean you cannot make connections after getting the job. While knowing other financial analysts is a bonus, it is very easy to make associations when you are focused and hard working.
Math is The Most Required Thing Here
Although it is true, that financial analysis is a game of numbers and one can infer the trends in the financial market by studying the same; this does not mean that one needs to belong from a math background. All a financial analyst needs is, to have a basic working knowledge of math and great analyzing skills.
There Is A Sea Of Technical Jargon To Wade Through
Financial AnalysisIt is an undisputable fact that there are a lot of technical terms to deal with when it comes to Financial Analysis; but it also true that anyone from a non finance background can master them too. Anyone can understand the inner workings of financial analysis through logic and common sense.
Short Term Courses Don’t Cut It.
Lately, there has been a rise in the number of institutes offering professional courses in the field of finance. These courses cover topics like financial modeling, wealth management, financial analysis, investment banking and many more. Although it may seem that these courses are unable to teach all that there is in financial analysis, the opposite of it is true. A lot of these courses offer programs which meet the industry standards. Some of them also have training offered by experts in the field of finance as well as internships and job placements.
Imarticus Learning is a leading education institute, which offers short term courses in both online and classroom formats in the field of financial analysis
Also Read: Benefits of Being Financial Analyst

Introduction To Leveraged Buyouts

Posted on by Imarticus Learning

Leveraged buyout (LBO) is an acquisition strategy where one employs a significant debt relative to the total capital employed of the target company. . This strategy is commonly used by private equity / LBO firms like KKR, Blackstone, CVC Capital and TPG.
For example, On 1stJanuary 2011, ABC Private Equity has acquired XYZ company for an enterprise value (EV) of $1.0 billion. Thetransaction is funded by $750 million of debt (75% of capital structure) and $250 million of equity (25% of capital structure) from ABC Private Equity funds.
This investment strategy is used to generate attractive returns to the private equity firms during the time of exit from their investment—provided that business plan targets for the target company are achieved. With regards to the above example, after three years of owning XYZ company, on 31stDecember 2013, ABC Private Equity sold XYZ for an EV of $1.5 billion, post full repayment of debt of $750 million at the time of exit, the private equity firm made an equity return of $750 million (EV at exit – debt outstanding) return on an initial equity investment of $250 million equating to an equity IRR of 44%.

Rationale:

A highly leveraged entity has a lot of benefits for an equity investor, including the following:

  • Leverage effect: A marginal increase in the company’s enterprise value can lead to a substantial increase in the value of its equity (see above example). In a bullish scenario, the attractiveness of an LBO will, therefore, increase. On a flip side, the leverage effect also means that high leverage increases the risk factor of aa private equity firm, sincea relatively small decline in enterprise value could severely impact the value of the equity investment. Moreover, high interest charges increase the risk of default by the company becausethe target company has to use a higher proportion of its cash flows in servicing the interest cost.
  • Tax Shield: Interest on debt is tax deductible and the cost of debt is generally lower than the cost of equity. As a result, increasing a company’s gearing should reduce its cost of capital. In other words, given the effect of taxes, debt is cheaper than equity.
  • Management discipline: High leverage increases the discipline on management, since a company’s cash flow is usually quite tight due to the necessary pay-down of interest and debt. Management is, therefore, likely to focus on cost management and optimal capital expenditure.
  • Incentivise management: LBOs are mostlystructured with substantial incentives like bonuses, equity stake and options to managers. This is based on achievement of business targets set by the LBO firms to increase the value of the portfolio company. Theseinitiatives generally motivate the managers of the business to perform better and thereby increase revenues and margins—all of which would lead to a better valuationmultiple at the time of the private equity firm’s exit.

Key characteristics of LBO candidates:

The LBO firm will seek to acquire companies with the following characteristics:

  • Company with strong management potential:Management is the key lever for growth, to drive cost management and hence margin expansion and value enhancement.
  • Strong companies with stable cashflows:The company needs to demonstrate stable cash flows since the company will be highly leveraged and need to be in a position to service debt on a regular basis.
  • Market leadership in the operating business:This will ensurestability in cash flows and relatively less capital expenditure requirements to fund growth.
  • Strong exit opportunities:The target company should convince the financial investor with strong exit opportunities in the form of trade sale, secondary buyout or initial public offering.

Key LBO terminology:

Enterprise value: Enterprise value (EV) is calculated by adding together a company’s market capitalization, its debt such as bonds and bank loans, other liabilities such as a pension fund deficit and subtracting liquid assets like cash and investments.
IRR:Internal rate of return (IRR) is a measure of return on an investment that takes both the size and timing of cash flows into account.
Senior debt:Senior debt is a debt that is paid first in the event of a default.
Subordinated debt:Subordinate debt is debt,whichin the event of a default, is repaid only after senior debt has been repaid. It is higher risk than senior debt.
Coupon:The interest paid on a bond expressed as a percentage of the face value. If a bond carries a fixed coupon, the interest is usually paid on an annual or semi-annual basis.
Trade sale:A trade sale is a common way of exit to a trade buyer. This allows the management to withdraw from the business and may open up the prospect of collaboration on larger projects.
Secondary buyout:Secondary buyoutrefers to an investment in an existing private equity backed company, which can enable the incumbent investor to realise the value of their investment.
 
Sources: Reuters, mergers-acquisitions.org
Learn about Leveraged buyouts through our Financial Analysis Course called IFAP (Imarticus Financial Analysis Course)