Analysing a company’s finances reveals the overall well-being of the business and its economic health and helps predict the company’s future. Thus, analysing a business’s financial performance indicates whether it has the potential to boost its profits and operations or not.

There are multiple ways of measuring the economic performance of a business, FCF or Free Cash Flow being one of them. If financial modelling and analysis intrigue you, this blog is for you. Jump into this piece to learn more about Free Cash Flow and its component, Discounted Cash Flow.

What is Cash Flow?

Cash flow indicates the overall movement of money in a specific financial year regarding the decline or increment of money in an organisation. Working, funding and contributing are the three ways to ensure smooth money flow. 

Understanding Free Cash Flow

Every business has its daily operations and expenses, like taxes, payroll, rent, inventory costs, and so on. Free Cash Flow measures the remnants of a business beyond its day-to-day expenses. It’s an effective measure of profit which ignores all non-cash expenses. It only considers the cash, which supports business operations and helps maintain stocks and assets.

Formula:

Free Cash Flow = Operating cash flow – capital expenditures

Various Approaches to FCC

FCF calculation takes two main approaches:

• Revenue approach: In this straightforward approach, first, all revenues are added, and then the expenses, like cash, interest payment, taxes, loans etc., are deducted.
• Net profit approach: This approach begins with a company’s net profit, measured after calculating taxes and costs. Add the non-cash elements to your net profit and deduct any significant expenses incurred and interest payments.

Understanding Discounted Cash Flow

DCF, or Discounted Cash Flow, is an evaluation method which estimates investment value based on predicted cash flows. DCF attempts to evaluate an investment today based on predictions about the ability of the investment to create money in the future. Thus, DCF is an ideal tool for budgeting.

Formula:

DCF formula

DCF Calculation

There are three steps encompassing DCF calculation. First, forecasting cash flow expectations from the investment and second, choosing a discount rate based on the total cost of bearing the investment. And last, with a financial calculator, discounting the predicted cash flow towards the current day valuation. 

What are the benefits of Free Cash Flow?

Free Cash Flow removes any guesswork that usually comes with other similar tools. Here are the benefits of FCF:

Offers accurate, detailed stock value

Investors are engaged in daily stock comparisons. However, most valuations are relative, have ease of use and aren’t always accurate. FCF offers the investors accuracy, with detailed stock value and hence helps in better decision making.

Reduces uncertainty

In investment, there’s no tool to avoid uncertainty absolutely. FCF works to substantially reduce uncertainty by separating fruitful stocks from those potentially attracting loss. It helps investors to reduce their overall investment risks. 

A chance to look into a company’s future

If the investors wish to predict a company’s growth, they must estimate backward from the current asset price with the cash flow model. It gives an idea of the company’s actual value.

What are the drawbacks of Free Cash Flow?

Like any other tool, FCF also comes with its share of shortcomings. Here are its drawbacks:

Not beneficial for long-term investors

Short-term investors can benefit from FCF, but FCF does not fit long-term investors. Many uncertainties and mishaps can occur over 15-20 years, and FCF is ill-adapted to accommodate those.

May indicate a lack of investment

Higher FCF values can indicate that the business needs to invest more effectively. On the contrary, extremely low FCF values can indicate a company’s extreme expansion and growth.

What are the benefits of Discounted Cash Flow?

Using precise numbers is one top benefit of using Discounted Cash Flow. It is highly objective rather than subjective. Here are the benefits:

Highly detailed

DCF uses specific numbers, which makes it a highly detailed tool. Such specific values include growth rate, cash flow predictions, etc.

No use of comparables

DCF doesn’t work by using comparables. It doesn’t use market value comparisons, unlike other businesses.

Suitable for long-term investors

For long-term investing, DCF is ideal since it examines long-term values. It examines any project earning or investment through its entire economic life.

Accommodates sensitivity analysis

DCF allows the experts to examine how any change in the investment assumptions can affect the final value.

What are the drawbacks of Discounted Cash Flow?

To be precise, DCF demands that users collect significant data, making it time-consuming. Here are some other drawbacks of the tool:

Difficult to create accurate projections

Projecting cash flow for the next 10 or 15 years is challenging. This analysis is susceptible to various variables, and any minute change in the prediction can have immensely different results.

Complex analysis

Discounted Cash Flow requires multiple data, and the formula itself can be tricky to understand. Thus, it can complicate the entire calculation and require extensive expertise to deduce results correctly.

External factors are excluded

Future prediction is tough, especially in wobbly times. This was particularly proven during the covid times. Thus, often predictions do not generate accurate evaluations. 

Conclusion

Both free cash flow and discounted cash flow are widely used financial tools. While free cash flow is more suitable for calculating business valuations, discounted cash flow offers insight into whether an investment has long-term worth. A financial analysis course can aid prospective financial sector employees in mastering these tools and gaining industry-relevant knowledge.

If you want to bolster your knowledge about financial modelling and the associated tools, you can check out the financial analysis course offered by Imarticus. The Financial Analysis Prodegree, offered in collaboration with KPMG, runs for 120 hours and offers industry certification. This skill-building programme is available for learners as a part-time course, where you can learn crucial and job-relevant skills for a career in financial analysis, financial modelling, equity research, financial valuation, and much more. Learn from top industry experts and give your CV the necessary boost.

Explore Imarticus now and book your seat! 

Financial statement analysis is a crucial process that enables businesses and investors to evaluate a company’s financial health and performance. It involves examining financial statements, such as the balance sheet and cash flow statement, to gain insights into various aspects of a company’s operations. 

One important tool used in financial statement analysis is ratio analysis. Ratios provide meaningful information that helps assess a company’s financial position, profitability, efficiency, and overall stability. 

Financial statement analysis is the act of studying and analyzing a company’s financial accounts to make wiser economic decisions and increase future revenue.

This blog post will explore the role of ratio analysis in financial statement analysis and its significance.

What is the role of ratio analysis in financial statement analysis?

Ratio analysis involves calculating and interpreting various financial ratios derived from the information presented in financial statements. These ratios offer a quantitative perspective on a company’s performance, allowing analysts to assess its strengths, weaknesses, and trends over time. Analysts can identify areas of concern by comparing ratios with industry standards and historical data and make informed decisions.

The method of examining the connection (or ratio) between two or more financial data points from a company’s financial statements is known as financial ratio analysis.

Here are some best practices for ratio analysis:

• Pick the appropriate ratios. Ratios are not all made equal. Depending on the sort of firm you are studying and the information you are looking for, some ratios are more significant than others.
• Use a set of ratios that stays constant throughout time. This will make it easier to see company financial performance trends over time.
• Compare the company’s ratios to previous ratios, businesses in the same sector, or benchmarks for the sector. You may use this to see how the business performs compared to its competitors.

How to use ratio analysis in financial statement analysis?

Comparable to a magnifying glass, ratio analysis lets you view the finer elements of a company’s financial statements. It works as a detective tool that may assist you in finding hidden hints regarding the operation of the business. 

Investors and analysts can better understand a firm’s financial health and performance by comparing various ratios over time or to other companies.

The study of financial statements may use a wide variety of ratios. Among the most typical are:

• Liquidity ratios gauge the capacity of a business to fulfill its short-term obligations. The current, quick, and cash ratios are a few examples of liquidity ratios.
• Solvency ratios gauge an organization’s capacity to fulfill its long-term commitments. The debt-to-equity ratio, the debt-to-assets ratio, and the interest coverage ratio are a few examples of solvency ratios.
• Profitability ratios gauge a business’s capacity for making money. Some profitability ratios are the net profit margin, return on assets, and return on equity.
• Activity ratios gauge how well a business uses its resources. The inventory turnover ratio, days sales outstanding (DSO), and asset turnover ratio are a few examples of activity ratios.

You must first collect the financial information for the firm you are evaluating to utilize ratio analysis. The company’s financial statements, normally submitted to the Securities and Exchange Commission (SEC), contain this information. Once the ratios have been calculated, you can compare them to the company’s historical ratios, businesses in the same sector, or benchmarks set by the sector.

Assessing Liquidity and Solvency

One crucial aspect of financial statement analysis is evaluating a company’s liquidity and solvency. Liquidity ratios, such as the current and quick ratios, provide insights into a company’s ability to meet its short-term obligations. These ratios indicate whether a company has sufficient assets to cover its liabilities. 

Solvency ratios, such as the debt-to-equity ratio and interest coverage ratio, help determine a company’s long-term financial stability and ability to meet long-term obligations. Financial ratio assessment is the practice of examining a company’s performance and financial health using financial ratios. Investors and analysts can better understand a firm’s financial health and performance by comparing various ratios over time or to other companies.

Evaluating Profitability

Profitability is a key factor in assessing the financial performance of a company. Ratio analysis enables analysts to evaluate profitability through ratios. These ratios measure the company’s ability to generate profits from its operations, indicating its efficiency and competitiveness within the industry.

Analyzing Efficiency and Productivity

Efficiency ratios assess how well a company utilizes its assets and resources to generate revenue. These ratios include inventory turnover, accounts receivable turnover, and asset turnover ratios. They provide insights into a company’s management of inventory, collection of receivables, and utilization of its assets. Analysts can also identify areas where improvements can be made to enhance operational efficiency and productivity by analyzing these ratios.

Comparing Performance and Industry Benchmarks

Ratio analysis is valuable for benchmarking a company’s performance against industry peers and competitors. Analysts can identify areas where a company is underperforming or outperforming by comparing ratios across companies within the same industry. This information helps set realistic goals, identify competitive advantages, and formulate strategies for improvement.

The Final Words

Ratio analysis plays a vital role in financial statement analysis by providing valuable insights into a company’s financial performance, stability, and prospects. It helps analysts and investors make informed decisions by assessing liquidity, solvency, profitability, efficiency, and comparative performance. 

However, it is essential to note that ratio analysis is just one tool among many in evaluating a company’s financial health. It should be used with other qualitative and quantitative factors to form a comprehensive assessment. 

The Financial Analysis Prodegree, offered by Imarticus Learning in collaboration with KPMG in India, is a meticulously designed program. This skill-building course, which lasts 120 hours, equips learners with in-depth knowledge and skills in several fundamental financial areas. It seeks to provide people with industry-relevant skills so they may relaunch their careers in financial analysis.

By leveraging ratio analysis effectively, businesses and investors can gain a deeper understanding of a business’s financial position and make more informed decisions for the future.

Can a financial analyst course make you a better finance professional?

A Financial Analyst guides companies, organizations, and individuals on all matters relating to finance. All business investment decisions are facilitated by analysing economic and business trends and the company’s financial strategy.

Finance Analysts work in banks and investment firms and also for general corporations. You need a grounding in finance, economics, accounting, and statistics as a start to pursuing a career as a financial analyst. Get a Financial analyst pro degree from Imarticus learning Pvt Ltd to give a boost to your career as a Financial Analyst.

What is the main function of a financial analyst?

A financial analyst normally works with financial data and manipulates it to show the underlying trends, whether seasonal or otherwise, calculates inter-firm and intra-firm ratios for understanding the company’s financial position, and analyses the industry or the sector where the company is working.

• A financial analyst builds financial models and does sensitivity and scenario analysis with conservative and aggressive assumptions.
• Analyses economic and business trends to provide information on which business decisions are based.
• Help in the development of budgets and long-term forecasts for the organisation.
• Conduct project appraisals and apply discounting techniques to evaluate the project viability.
• Analyse equity securities and provide buy, sell and hold recommendations.

There may be jobs where you can work as a buy-side analyst or sell-side analyst. Job openings will be available with banks, insurance companies, mutual funds, and independent money managers.

• If you attain enough experience and seniority, you can work as a portfolio manager, investment manager, or fund manager at a mutual fund house.

Educational qualifications required to be a financial analyst

A Bachelor’s degree in Commerce, Economics, or Engineering: A basic degree in maths, economics, or commerce will provide the proper grounding to pursue higher education in financial analysis and asset management.

Post Graduate degree: An MBA in Finance and Investments can come in very helpful to create the groundwork for Asset and Portfolio Management.

Higher Certification in Financial Analysis: The Chartered Financial Analyst certification from The Association of Investment Management and Research (AIMR), Virginia, is the ultimate academic achievement in Portfolio Analysis and Investment Management. It is a rigorous 3-year course. To help you prepare for this course and a career in Financial Analysis and Portfolio Management, financial analyst courses are offered at Imarticus Learning Pvt Ltd. They offer a Financial Analysis Prodegree, which offers valuable help in kick-starting your career as a Financial Analyst.

 What are the skillsets that a Financial Analyst is expected to have?

• Financial software knowledge 
• Budget management training
• Financial reporting skills
• Research skills
• Accounting knowledge
• Analytical ability
• Financial literacy
• Data analysis
• Corporate finance knowledge
• Communication
• Negotiation
• Influencing
• Critical thinking
• Flexibility
• Resilience
• Collaboration
• Problem-solving

 Plan your future as a Financial Analyst 

• As mentioned above, becoming a Financial Analyst is based on the right combination of education, certification, and experience. Plan all the various steps to ensure adequate preparation for your career.
• Take the right course. Sharpen your investment analysis and data analysis skill sets. The Financial Analysis Prodegree will hone your skills in data analysis, financial literacy, and proficiency. Imarticus Learning’s Financial Analyst training courses offer the right curriculum and mentorship to jumpstart your career.
• Look for banking, mutual fund, and financial services internship opportunities.

You will gain practical experience, valuable insights, investment knowledge, and networking opportunities which will be extremely helpful in getting a job. Additional professional qualifications and internship experience will boost your profile.

• After the completion of your Financial Analyst course, you can look for entry-level openings in banks, mutual funds, and the financial services industry.
• Prepare for your interview. Your Financial Analyst course will be extremely helpful in your ability to analyse and answer questions posed by the interviewer.

 Career Paths available for a Financial Analyst

• Financial Planning Manager in a large Corporation.
• Portfolio Manager for a mutual fund, investment companies, high net worth individuals, wealth management division of banks, and independent money managers.
• Rating Manager at a well-known credit rating agency. Analysis of credit ratings involves detailed financial analysis and business analysis of the company
• Risk Manager with a bank, financial institution, or a non-banking financial institution
• Fund Manager with a mutual fund. You guide the fund’s overall objective and not only do financial analysis but also make investment decisions on behalf of the fund.

Conclusion

The future is very bright for Financial Analysts in India with the growth of equity investors investing either directly through the equity route or the mutual fund route. The growth of the Fintech sector also requires financial analysts to assist in their further development.

Learn Financial Analysis to develop a competitive edge in your career search. Learn state-of-art skills by doing a Financial Analyst training course available at Imarticus Learning Pvt Ltd.

 You can contact Imarticus Learning Pvt limited through chat support or drive to our training centers in Mumbai, Thane, Pune, Chennai, Bengaluru, Delhi, Gurgaon, or Ahmedabad.

Financial markets are volatile – Tips for rising in an investment banking career

The financial sector is one of the most thriving sectors in the economy. Despite so many ups and downs, this sector keeps rising and shining. And, this is perhaps the reason why more and more individuals opt for an investment banking career. But as you know, financial markets are highly volatile, you can’t predict what will happen next. So, to keep up with the changing market trends, you need to keep polishing your skills and abilities even as an investment banker. 

In this article, we are sharing some important tips that will help you grow your career and achieve new heights in the investment banking sector. Keep reading! 

Tips for Growing an Investment Banking Career 

Following are some tips that will help you build a successful investment banking career:

1. Make Sure it is the Right Job for You

Unlike many other careers, investment bankers have a range of jobs to choose from. Note that different investment bankers may come from different backgrounds. So, they can use their transferable skills to join a profession that matches their interests. In the investment banking sector, you can move into trading, financial planning analysis, research, valuation, or structuring posts. For example, if you are good at research and valuation and have a keen interest in investing, then you can grow your career as an investor or a financial advisor. 

Although investment banking is a very high-profile but demanding job, the financial rewards it provides make it worth working hard for. 

Understanding your key skills and interest areas will help you remain focused and earn better opportunities in your IB career. 

2. Don’t Stop Learning 

Since the financial market keeps changing every day, you need to keep polishing your skills and abilities. Even after you get a job, don’t stop working on your skills. Investment banking is a vast field, and it offers many opportunities to become an expert. One good way to learn investment banking is to enrol in the best investment banking courses. In fact, the right IB course is your answer to — how to become an investment banker.

Once you secure the right job and gain some experience, you can consider becoming an expert by earning various investment banking certifications like Chartered Financial Analyst and Certificate in Investment Management. 

3. Do an Investment Banking Internship 

The majority of the top banking institutions and corporations, including J.P Morgan, Goldman Sachs, Barclays, and Morgan Stanley, offer great internship opportunities to individuals. 

For example, JP Morgan offers a 9-week investment banking analyst programme for students, where they can learn important technical skills by working on transactions and deals for the company’s clients. The best part is you can even secure a full-time job depending on your performance. 

However, do your own research and get your facts straight in order to make an informed decision. To do this, you can learn about different opportunities and select the one that matches the best with your interests. 

4. Attend Events and Network 

This is another great tip for a rising career in investment banking. Networking with experienced professionals not only helps you gain knowledge but also helps in earning new opportunities. You can grow your network by meeting new people in your field or contacting them via social networking platforms like LinkedIn. Besides, there are many virtual talks and sessions held online, which can give you a fair idea about the challenges, demands, and working styles involved in investment banking jobs. 

5. Be Passionate 

There is no doubt that investment banking is a highly rewarding career when it comes to salary. You can surely grow your financial health by securing a job in this sector. However, attractive pay should not be the only reason to work in this industry. Hence, it is extremely important to stay interested and passionate about your job. Once you do that, investment banking will become a job you’ll never want to leave. It is one of the most interesting career options that can help you grow professionally as well as personally. 

To Sum Up 

Getting into an investment banking career is a dream of many. All you need is the right road map, guidance, and passion to become a successful investment banker. The tips we have mentioned above will help you raise your career in the field. Moreover, one last piece of advice is when you land your first job, always keep polishing your skills by taking different investment banking courses and certification programs. This will aid your career progression to a great level.