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Cash Flow Statement Vs. Fund Flow Statement: Key Differences

Posted on by Imarticus Learning

Financial statements are necessary for companies to keep track of their company’s economic health. Such documents also help business owners make strategies for the future with regard to mergers, acquisitions, investments, and so on. The role of a financial analyst is indisputable in such matters. 

Two such essential components of financial analytics are cash flow statements and fund flow statements. While both might sound the same, in reality, there is a difference between cash flow and fund flow, as these two statements have different features and provide different kinds of advantages to businesses. 

In this article, we will dive into what is cash flow statement and what is fund flow statement, their advantages, and the key difference between cash flow and fund flow to offer a comprehensive view.

Keep reading to learn more!

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What is Cash Flow?

The cash flow of a company refers to its inflow and outflow of cash and its cash equivalent. A cash flow statement is a recording of this money flow to and from the company. 

A cash flow statement is one of the most important pieces of financial statements recorded by financial analysts in order to gauge a company’s current liquidity and help make decisions regarding investments. It also helps keep track of changing opening and closing cash balances. 

The difference between cash flow and fund flow is that cash flow statements are created for specific time periods, like quarterly, semi-annually, or annually. The primary components of cash flow statements are:

  • Cash flow from investing activities
  • Cash flow from operating activities
  • Cash flow from financing activities

Advantages of Cash Flow Statement

The primary advantages of cash flow statement are:

  • It helps in assessing the profitability of a business.
  • It helps in assessing company balance sheets and profit and loss statements. 

Disadvantages of Cash Flow Statement

The disadvantages of cash flow statement are as follows:

  • It provides an incomplete profit view since it excludes non-cash accounting items, resulting in a limited picture of profitability.
  • It cannot be used as a standalone tool and needs to be analyzed alongside other statements, such as the balance sheet and income statement.
  • It represents past cash flows and may not correctly reflect the current or future financial status.

What is Fund Flow?

Fund flow signifies the working capital of an enterprise. Thus, a fund flow statement tracks and records the net movement of funds in and out of the enterprise. 

Fund flow statements are ideal for long-term financial planning. Furthermore, irregularities in company funds can be identified through fund flow statements. In addition to helping monitor the working capital of a business, fund flow statements also aid in capital budgeting. 

The main components of working capital that form a part of fund flow statements are:

  • Inventory
  • Receivables
  • Cash
  • Payables

Advantages of Fund Flow Statement

Let’s look at the following advantages of fund flow statement:

  • It helps company owners and managers understand how efficiently funds are being allocated and utilised within the company. This information can help further optimise the process. 
  • Fund flow statements are useful in deducing the fund-generating capacity of any business. This data can be handy while making future financial decisions. 
  • Fund flow statements also help improve resource usage and better allocation of limited resources. 

Disadvantages of Fund Flow Statement

Below are the disadvantages of fund flow statement:

  • Fund flow statements deal primarily with historical data and do not provide real-time insights into a company’s current financial situation or future prospects.
  • Fund flow statements solely consider cash transactions and exclude non-cash elements such as depreciation or changes in non-cash working capital. This may give an imperfect picture of a company’s financial condition.
  • Fund flow statements can be complex, requiring an in-depth understanding of accounting principles to interpret them correctly. Interpreting the causes of fluctuations in fund balances can be difficult.

Key Difference Between Cash Flow and Fund Flow Statement

While cash flow and fund flow statements are crucial parts of a company’s finances, they differ. The difference between cash flow and fund flow are discussed below:

Cash Flow Statement Fund Flow Statement
Denotes the inflow and outflow of cash and cash equivalent over a given period of time.  Denotes the changing working capital of a company over a given period of time. 
Helps in deducing the net cash flow of a business.  Helps in deducing the financial position of a business.
Is used for cash budgeting. Is used for capital budgeting.
Part of a company’s financial statement. Not part of a company’s financial statement.
Documents the inflow and outflow of cash and changes in the opening and closing balances of cash.  Documents the source and application of a company’s funds. 
All kinds of disclosures regarding the inflow and outflow of cash are mandatory.  Helps disclose the source and application of any given fund. 
Aids in short-term financial decision-making or planning.  Aids in making long-term financial plans and decisions. 

Conclusion

After examining the difference between cash flow and fund flow, we can say that both statements are essential for companies to understand their current financial position and strategize for the long term.

Both of these statements come with their advantages and features; hence, neither can be ignored while making financial decisions. Therefore, companies are always on the lookout for trained financial analysts who can understand the difference between cash flow and fund flow statements, prepare and track such statements, and help make the most effective economic decisions.

So, if you want to take advantage of this market demand, why not get enrolled in Imarticus’s financial analyst course? The Financial Analysis Prodegree course, in collaboration with KPMG, is one of the best in the market to offer you in-depth financial analyst training. Within a span of four months, you will be able to learn all the fundamentals of financial analytics from industry experts, get live online training, extensive career support, industry certification, and much more. Sign up today for a shining career ahead!

Navigating Top Financial Statement Analysis Tools and Techniques

Posted on by Imarticus Learning

Following the performance of the company and its competitors is important in today’s cutthroat business environment, as it will assist the company in sustaining and developing. Planning, directing, and analysing financial business transactions using tools of financial statement analysis enables a firm or organisation to retain its financial position. Common size statements, comparative financial statements, ratio analysis, and benchmarking analysis are the top four tools of financial statement analysis

In this article, let’s learn about various tools of financial statement analysis and other aspects.

Meaning of Analysis of Financial Statements

The process of examining a company’s financial statements to make decisions is known as financial statement analysis. Internal and external stakeholders utilise financial statement analysis to assess the worth and performance of an organisation. 

All businesses are required by financial accounting to produce balance sheets, income statements, and cash flow statements, which serve as the foundation for financial statement analysis. External stakeholders use it to assess the general health of a company as well as its financial and commercial value. It also serves as a monitoring tool for handling finances for internal stakeholders.

Analysts examine financial statements using three methods: ratio analysis, vertical analysis, and horizontal analysis.

Tools of Financial Statement Analysis 

Ratio Analysis 

The relationship between two or more financial statement items is established using the quantitative analysis technique known as ratio analysis. It involves analysing the cash flow statement, income statement, and balance sheet to assess various aspects of an organisation’s operational and financial performance.

Ratio analysis provides insights into a company’s economic performance, such as its effectiveness, liquidity, profitability, and solvency, to help in decision-making.

Common Size Statements 

A common-size statement is one of the important tools of financial statement analysis. It directly impacts the organisation’s financial statements by rendering all items as a percentage of a standard base value. This approach facilitates easier comparisons between companies or different time periods within a company’s history.

Comparative Statements 

Comparative Financial accounts are the financial accounts of an organisation for various periods. Users must employ the tools of financial statement analysis or procedures to understand the comparative statement. 

Several financial statement components may be presented in a comparative format in a table. It makes it possible to quickly compare several parameters across two or more periods. In the context of financial instruments and strategies, the comparative statement is crucial.

Trend Analysis 

Trend analysis is one of the most critical tools of financial statement analysis. It is based on the fundamental principle that past events can serve as predictors of future outcomes. 

Trend analysis is a method employed in financial analysis that utilises historical data to forecast future results. It can be used in one or more organisations within the same period or by a single organisation across different periods.

Fund Flow Analysis 

The methods and instruments of financial statement analysis are enhanced by the inclusion of a cash flow statement. It provides a comprehensive overview of an organisation’s cash inflows and outflows during a specific period. The cash flow statement is used to research how an organisation’s financial status changes from the beginning to the end of a period. 

Cash Flow Analysis 

Cash flow analysis is another crucial aspect of financial statement analysis. It gives a summary of the sources of the cash inflows and outflows for a specific period. 

The cash flow statement is used to examine how the financial health of an organisation changes over time. It keeps a check on the cash movement within a company, including the cash from operating activities, investing activities and financial activities. It is one of the valuable tools of financial statement analysis for assessing an organisation’s cash flow dynamics. 

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Types of Financial Statements Analysis 

Three major strategies are most frequently used by analysts to examine the different types of financial statements of a corporation.

Horizontal analysis:

Horizontal analysis is frequently used to identify growth patterns throughout time. It uses historical data to mainly analyse the value of line items from two or more years. 

Vertical analysis:

The vertical analysis, in addition, contrasts several financial statement components against one another. For illustration, a cost item might be stated as a percentage of revenue generated by the business. 

Ratio analysis

Finally, line-item data are compared using ratio analysis, a key component of fundamental equity analysis. Examples of ratio analysis include price-to-earnings (P/E) ratios, earnings per share, or dividend yield.

Conclusion 

Financial statement analysis is considered to be the pinnacle of understanding and modulating a company’s finances and decisions. To perform this duty, one must grasp the meaning of analysis of financial statements and acquire the necessary skills. 

If you are interested in taking up a course on financial statement analysis, check out Imarticus Learning’s Financial Analysis Prodegree in collaboration with KPMG. This degree would help you to build a career in banking, corporate finance, and private equity easily and enhance your overall career graph. 

What is the Importance of Financial Statement Analysis

Posted on by Imarticus Learning

Financial statement analysis is a crucial practice for individuals and businesses alike. It provides valuable insights into an entity’s financial health, performance, and stability. One can better understand why is financial analysis useful, as it gauges a company’s strengths, weaknesses, and potential risks by carefully examining its financial statements.

Generally accepted accounting standards (GAAP) are the foundation for financial reporting in the United States. The three primary types of financial statements a business must produce and maintain following these principles are the income statement, balance sheet, and cash flow statement. Standards for financial reporting are more stringent for publicly traded corporations. Accrual accounting is required by GAAP, which public corporations must adhere to.

In this blog post, we will explore the significance of financial statement analysis and how to analyze financial statements to make informed decisions.

What is Financial Statement Analysis?

Financial statement analysis involves the examination of financial documents. These statements provide a comprehensive snapshot of a company’s financial position and performance. By analyzing these statements, individuals can evaluate the company’s profitability, liquidity, solvency, and efficiency.

How to Analyze Financial Statements? 

You may assess a company’s financial health using several key indicators.

Some of the more significant ones are listed below:

Growth: Do your company’s sales and earnings go up or down each year? Is there a trend here?

Profitability: Compared to other businesses in your industry, how profitable is yours?

Liquidity: Can the business fulfill its immediate obligations?

Leverage: Does the business use borrowing to operate and expand?

Activity: How well are the company’s assets being managed?

These financial indicators may be used to monitor, evaluate, and assess the company’s financial situation. Profitability, liquidity, solvency, efficiency, and valuation are just a few areas under which financial KPIs (key performance indicators) can be divided.

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Why is Financial Statement Analysis Important for Businesses?

Financial statement analysis is essential to address the demands of stakeholders and other parties while also adhering to company rules and regulations. But just as crucial as adhering to excellent accounting processes is gaining the necessary abilities and instincts to analyze accurate financial statements.

Organizations can gain from different types of financial statements in various ways. It gives internal and external stakeholders a chance to make well-informed investment decisions. In addition, financial statement analysis offers lending institutions a frank assessment of a company’s financial standing, which aids in lending choices. 

Financial statement analysis also aids in corporate governance issues because top executives and other members of management depend on accounting to portray the results of their choices accurately.

Why is Financial Analysis Useful:

Assessing Profitability: Financial statement analysis enables individuals to assess a company’s profitability. Readers can gauge the efficiency and effectiveness of a company’s operations by analyzing key ratios like net profit margin, gross profit margin, and return on investment. Understanding profitability is essential for investors, creditors, and business owners alike.

Evaluating Liquidity: Liquidity refers to a company’s ability to meet its short-term obligations. By analyzing liquidity ratios, such as the current and quick ratios, readers can determine whether a company has sufficient resources to cover its immediate liabilities. This knowledge is crucial for investors and creditors when assessing the company’s ability to handle financial obligations.

Assessing Solvency: Solvency measures a company’s ability to meet its long-term obligations. Readers can evaluate solvency ratios through financial statement analysis, such as the debt-to-equity and interest coverage ratios. Understanding a company’s solvency is vital for potential investors and lenders, indicating its long-term stability.

The Key Financial Criteria Used to Estimate a Company’s Worth

Analysts estimate a company’s worth using several important financial criteria, such as revenue growth, profitability, cash flow, and return on investment. These measures allow analysts to examine a company’s financial performance and determine its potential for future profitability. 

Businesses can compare their financial performance to that of their rivals and industry standards using tools for financial statement analysis. This research offers insightful information on the company’s market position and competitive advantage.

Ultimately, financial research can benefit organizations trying to assess their worth and decide on investments, mergers and acquisitions, and other strategic efforts. Businesses can discover areas for improvement and create plans to enhance their financial position by doing financial analysis.

Uncovering Potential Risks

Identifying Financial Red Flags: Financial statement analysis helps uncover potential risks and red flags. By examining trends, anomalies, and ratios, readers can identify warning signs of financial distress, such as declining profits, excessive debt, or irregular cash flows. This information is invaluable for investors, allowing them to make informed decisions and avoid potential pitfalls.

Assessing Investment Viability: Financial statement analysis is crucial for investors who allocate their funds wisely. By evaluating a company’s financial performance, readers can assess an investment opportunity’s viability and potential returns. Analyzing financial statements provides insights into the company’s historical performance, growth prospects, and competitive advantages.

The Final Words: 

Financial statement analysis is a powerful tool that enables individuals to understand a company’s financial health and performance comprehensively. Readers can assess profitability, liquidity, and solvency by examining key ratios, trends, and anomalies and uncovering potential risks. 

With this knowledge, investors, creditors, and business owners can make informed decisions aligned with their goals and aspirations. Embrace the importance of financial statement analysis and unlock the potential for financial success.

Remember, financial statement analysis is not a one-time activity but an ongoing process. Regularly analyzing financial statements can provide valuable insights and ensure informed decision-making.

In partnership with KPMG in India, Imarticus Learning has created a Financial Analysis Prodegree, a finance course developed to build mastery across various functions. 

This 120-hour financial analysis certification course develops competence across many fundamental finance activities, giving participants the necessary industry knowledge to change or restart their careers. The course is a part-time, four-month course delivered live online on weekends. 

So, dive into the world of financial statement analysis and empower yourself with the knowledge to navigate the complex realm of finance.

Free Cash Flow vs Discounted Cash Flow

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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

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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! 

The Role of Ratio Analysis in Financial Statement Analysis

Posted on by Imarticus Learning

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

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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.

Capital Asset Pricing Model (CAPM)

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Data or numbers are quite important for a company, whether to project revenue or estimate costs. Thus to ensure success, any company needs to analyse its numbers properly. Financial modelling is one tool that helps represent a company’s data, past, present and even predicted future. It is used for accurate decision-making. Executives can use this tool for cost and profit estimation of any new project.

One popular financial modelling tool is CAPM or Capital Asset Pricing Model, often used in corporate finance. It helps to understand the relationship between market fluctuations and the risk posed by an asset or security, like a stock. 

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The projected employment growth for financial analysts is 9% between 2021 to 2031, thus making it an ideal career choice. If you want to become a financial analyst, then this is the correct time to take up a financial analysis course. Gain a basic understanding of a few financial models before embarking on a journey to become a financial analyst.

This article examines the CAPM model, its components, working, benefits, drawbacks and so on.

Capital Asset Pricing Model: What Is It?

Every investment comes with a risk and a return. The Capital Asset Pricing Model helps to understand this very relationship between investment risks and expected returns. It helps estimate the probable investment returns and determine the security or stock prices.

CAPM assessment demands a thorough understanding of unsystematic and systematic risks. The model was designed in the early 1960s primarily to estimate systematic risk, a risk which an institution can not avoid. For instance, risks related to inflation, recession, exchange rate, interest rate, etc. 

However, unsystematic risks are those related to investments in specific equities or stocks and are thus not regarded as huge threats. These risks are shareable in the general market. Thus, CAPM helps forecast the success or failure of investment by analysing the systematic risks.

CAPM Assumptions

Here are the assumptions of the CAPM Model:

  • A diversified portfolio managed by investors
  • Investors will lend and borrow at a risk-free return rate.
  • A perfect capital market where every security is valued correctly.

CAPM Formula

Here is the formula for the Capital Asset Pricing Model assessment:

Ra = Rf + Be x (Rm – Rf)

Where,

  • Ra denotes the expected rate of return
  • Rf denotes the risk-free return rate
  • Be is the beta factor of the transaction
  • Rm – Rf denotes the market risk premium

What Are the Various CAPM Components?

Read this section to find out more about each CAPM component. 

Expected rate of return

The expected rate of return is the amount the investor will fetch from investing in an asset. It is based on multiple factors like beta, market risk premium, etc. It’s a long-term presumption about how any investment can roll over in its lifetime.

Risk-free return rate

A risk-free return rate denotes money’s value over time. It is measurable in terms of the yield generated by a 10-year-old government bond of the United States. U.S.-based securities are usually taken as a baseline for this component since it’s highly improbable that the U.S. government would default on payment. Thus, no payment default is synonymous with minimal risks for the investors.

Beta 

Beta measures the volatility of any stock, equity, investment, or asset. It provides an idea about a stock’s risk by analysing its price fluctuation concerning the overall investment market. In other words, the beta factor shows an asset’s sensitivity towards market fluctuations.

Sensitive stocks have incredibly high beta and are thus volatile, while a more stable asset will have low beta and will be less volatile. Measured in number, 1 is the benchmark. Any stock having a beta less than 1 is more stable than market fluctuations and is thus less volatile.

Assets with a beta of more than 1 are less stable than market fluctuations and more volatile. Stocks with negative beta values have an inverse relationship with fluctuations in the market.

Market risk premium

A market risk premium is the investor’s reward for taking a riskier investment rather than opting for a low or zero-risk one. Assets, stocks, or investments with more significant risks have a higher market risk premium than the ones with lesser risks.

CAPM Calculation Example

Here’s an example to understand CAPM calculation better.

Let’s assume that an investor plans to invest in an equity valued at ₹100 per share today. It generates an annual dividend of 3%. Let us further assume that the beta here is 1.3, and 3% is the risk-free rate. We also assume that the investor predicts the market value to soar at 8% per year. 

Thus, the expected rate of return = 3% + 1.3 × (8%−3%) = 9.5%

What Are the Advantages of Using CAPM?

The advantages of using CAPM are as follows:

  • Easy to use because of the simple formula. 
  • Eliminates the assumption of unsystematic risks and only considers systematic risks. It indicates the reality since most investors keep a diversified portfolio.
  • The relationship between return and market risks has been derived theoretically after testing and empirical research. 

What Are the Shortcomings of CAPM?

There’s hardly a doubt that CAPM is a highly effective model. However, this effectivity is also paired with the following drawbacks:

  • The risk-free return rate can fluctuate in a few days, while the model considers short-term securities. This is a crucial flaw.
  • Beta determination can be time-consuming and challenging at times. 
  • The unrealistic assumption is that the investors can lend or borrow at the same rate as the government. 

Conclusion

Finance professionals must have a thorough understanding of financial modelling tools to help them examine the various financial aspects of an organisation. Enrol in a financial analysis course to upskill and launch a successful career as an investment banker or financial analyst. 

The Financial Analysis Prodegree offered by Imarticus in collaboration with KPMG is a 4-month course focused on helping learners secure a career in financial analysis, investment banking, corporate finance, and various other financial sector. Delivered by industry practitioners, the course offers 360-degree learning with industry certifications.

Explore Imarticus Learning to learn more.

Insider Tips for Successful Equity Research Analysis

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Introduction

Equity research analysis is a crucial aspect of the financial world that involves evaluating and analyzing various investment opportunities. Equity research analysts play a vital role in helping investors make informed decisions about buying or selling stocks. If you aspire to become a successful equity research analyst, acquiring the right skills and knowledge is essential.

Financial Analyst Courses

Imarticus Learning, in collaboration with KPMG, offers a comprehensive financial analysis course that equips you with the necessary expertise. In this article, we will discuss some insider tips to excel in equity research analysis and how the Financial Analysis Pro Degree from Imarticus Learning can help you achieve your career goals.

Insider Tips For Equity Research Analysis

1. Develop a Solid Foundation in Financial Analysis

To excel as an equity research analyst, it is crucial to have a strong foundation in financial analysis. This involves understanding key financial statements, such as balance sheets, income statements, and cash flow statements.

The Equity Research Analyst course by Imarticus Learning provides a comprehensive curriculum that covers these essential financial concepts. By enrolling in this course, you will gain a thorough understanding of financial analysis techniques and learn how to interpret financial statements effectively.

2. Stay Updated with Market Trends

Successful equity research analysts keep a close eye on market trends and industry developments. It is vital to stay informed about economic indicators, regulatory changes, and industry-specific news that may impact the stock market. Imarticus Learning’s Financial Analysis Pro Degree emphasizes the importance of staying updated with market trends and provides insights into effective methods for monitoring and analyzing the market.

3. Master Excel and Financial Modeling

Proficiency in Excel and financial modeling is a must for any equity research analyst. These tools enable you to organize and analyze large amounts of financial data efficiently. Imarticus Learning’s Equity Research Analyst course includes hands-on training in Excel and financial modeling. You will learn how to build comprehensive financial models, perform sensitivity analysis, and create meaningful reports and presentations.

4. Develop Strong Analytical Skills

Analytical skills are the backbone of equity research analysis. As an equity research analyst, you need to evaluate a company’s financial health, assess its growth prospects, and determine its fair value. Imarticus Learning’s Financial Analysis Pro Degree hones your analytical skills by teaching you various analytical techniques, valuation methodologies, and investment strategies. These skills are essential for making informed investment recommendations.

5. Conduct In-depth Company and Industry Research

To provide valuable insights to investors, equity research analysts must conduct thorough company and industry research. Imarticus Learning’s Equity Research Analyst course trains you in conducting in-depth research by leveraging various data sources and analytical tools. You will learn how to analyze a company’s competitive position, industry dynamics, and macroeconomic factors that may impact its performance.

6. Develop Effective Communication Skills

Communication skills are crucial for equity research analysts as they need to articulate their research findings and investment recommendations to clients and stakeholders. Imarticus Learning’s Financial Analysis Pro Degree emphasizes the development of effective communication skills through presentation training, report writing, and client interaction sessions. These skills will enable you to convey complex financial concepts clearly and concisely.

Financial Analysis Pro Degree By Imarticus Learning And KPMG

The Financial Analysis Pro Degree offered by Imarticus Learning in collaboration with KPMG is a comprehensive program designed to equip aspiring equity research analysts with the necessary skills and knowledge. This 4-months program provides a structured curriculum that covers essential financial analysis concepts, including financial statement analysis, industry research, valuation methodologies, and investment strategies.

Through hands-on training in Excel and financial modeling, students gain proficiency in analyzing and interpreting complex financial data. The Financial Analysis Pro Degree also emphasizes the development of effective communication skills, enabling students to present their research findings and investment recommendations confidently. With an industry-relevant curriculum and practical learning experiences, the Financial Analysis Pro Degree prepares students for a successful career in equity research analysis.

Final Thoughts

Becoming a successful equity research analyst requires a combination of knowledge, skills, and practical experience. Imarticus Learning’s Equity Research Analyst course, in collaboration with KPMG, provides you with the necessary expertise to thrive in this field. From mastering financial analysis to staying updated with market trends, the course equips you with insider tips for successful equity research analysis.

The Financial Analysis Pro Degree also provides extensive career support and industry certification, which is accepted by top companies around the world. The students of the Equity Research Analyst course are currently working with companies like Wipro, Infosys, Accenture, JP Morgan, TCS and more.

By enrolling in the Financial Analysis Pro Degree, you can take a step towards a rewarding career as an equity research analyst.

Is learning financial analysis hard? These 5 tips will make it easier

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Is learning financial analysis hard? These 5 tips will make it easier

Being skilled in financial analysis is a dream statement for almost everyone looking to refurbish their resumes or even bring it up in casual conversation. Well, financial analysis is the current hot-selling cake. Everyone you know wants to have a piece of it. So, let us try to decode the meaning of the term. 

What is financial analysis? 

Simply put, financial analysis is about gaining insights into an organisation’s financial information. No matter your role in your company, it is a highly valued skill. When we say that someone is a master at financial analysis, we mean that they can analyse the company’s financial statements and contextualise them into the broader market space. It further helps the person arrive at strategic business decisions once they have a grip on the numbers. Financial analysis is hence considered to be a top skill when it comes to managerial decision-making. 

If you are someone who does not have a background in finance, there is absolutely no reason to worry! There are several methods through which learning this skill can be simplified for you. 

Essential skills for practising financial analysis: 

  • Ability to read and interpret financial statements, which include the cash flow statement, income statement and the balance sheet 
  • Each of these statements carries information vital to understanding the financial health of the organisation 
  • Computation of critical financial ratios which come in handy to compare trends within the same or similar industries 
  • Producing actionable insights through the information presented by the economic data
  • Comparing the organisation’s position with the growing market trends and positioning forces into action so that future movement can be forecasted 

Here are the five tips to make learning financial analysis easier: 

  • Earn a degree in the field of finance:

executive program in finance and banking course

It is a smart move to have a background in finance if you want to excel in financial analysis. The CFA Course in India is gaining a lot of popularity. The exams for the course are being held locally due to the ongoing pandemic. You can also opt for a Bachelor’s degree in finance or its related field. Chances of landing your dream job may increase after pursuing an MBA or applying for the CFA certification, as it is regarded as the standard gold degree in finance. 

 

  • Opt for an online course or certificate program:

 

CFA will provide you with the CFA charter holder after completing four years of work experience in finance. You do not have to worry about attending physical classes as learning in an online certificate program is self-paced. The financial analyst training and placement are facilitated by the financial analysis prodegree, which powers tech-enabled learning. The learning management system (LMS) hosts all the study material on a single platform. You can prepare your schedule and track your learning accordingly. 

The financial analyst training and placement program provides end-to-end support through resume building, LinkedIn profile building, and mentorship sessions. You will be job-ready after the completion of the course. Leading industry experts teach the vast curriculum with rich experience working in actual markets. The program is interactive and competitive and will help you build on your quick thinking abilities. 

big data analytics courses

The program includes accounting and financial modelling courses. It also covers valuation and corporate strategy modules along with equity research and M&A. It offers a comprehensive curriculum in terms of learning. The financial analyst training and placement program will assist you in preparing for job interviews and selecting a profile best suited to your skills. 

 

  • Learning from real-life examples:

 

The expert faculty holds a significantly impactful experience in the market. On-ground experience is a lot different than learning a skill in the classroom. The financial modelling courses they teach will also come with examples of how it helps them on the job. Real-world examples will guide you to apply the skills and develop your critical thinking abilities. 

 

  • Gain a hands-on exposure:

 

The simulations and case studies forming part of the curriculum will help you implement and practise essential concepts. Taking up challenges at work is going to be a routine, so understanding the financial data in-depth and assessing its impact on a company’s performance will help shape you as a financial analyst. 

 

  • Leveraging your network and participating in finance conferences:

 

Learning from industry leaders’ experiences is a great way to kickstart and build a career. Make sure you gain financial analysis tips by utilising your professional network well. Hence, ensure that you are enrolling yourself as a part of the financial analyst community. 

Conclusion

Financial analysis skills help organisations gain a competitive advantage in the market. Whether deciding on a new hire or assessing the latest market campaign’s impact on the business, financial analysis is needed everywhere. This is by far the best investment you can make for your career. As we can see the country’s rapid growth and demand for financial analysts, the time to learn the skill is now!

To learn more about the financial analyst prodegree, you can contact us through chat support or drive to our training centers in major Indian cities, including Mumbai, Thane, Pune, Chennai, Bengaluru, Delhi, Gurgaon, and Ahmedabad.

The analogy between a financial analyst certification program and a ratio analysis course

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The analogy between a financial analyst certification program and a ratio analysis course

The Financial Analyst Certification Programs and the ratio analysis courses are online certificate courses that will enhance your qualities in particular topics and guide you to become one of the best analysts in the field. Let us understand what each course is about and how it can help you.

Financial analysis and its types – 

Financial analysis can be defined as a process that is led by the financial statement preparation of a company and then continued using various forms of analysis to assist business, investment, and financial decisions. Each method of analysis has its own specific purpose. They are – 

  • Vertical analysis – Vertical analysis is mainly used during the making of the financial statement or the balance sheet.
  • Horizontal analysis – The horizontal analysis is done to examine a spike or decline in the company data. The results are then used to determine a detailed examination of the finances.
  • Profitability analysis – Profitability analysis is done to check the profits of the business. This analysis is done to understand the costs of the company and what can be done to optimize it correctly.
  • Liquidity analysis – The liquidity analysis involved the calculation of the turnover rates of the company including the accounts, assets, working capital, and more. The general outcome of this analysis is to understand whether the company requires additional capital.
  • Valuation analysis – The valuation analysis is done to understand the valuation of the business like the cashflow valuation, the subsidiaries, and the compilation of the value of individual assets.
  • An industrial comparison – This is a very important analysis. This describes the place at which your company stands in comparison to the market or the average result of the industry. This also helps in understanding the strategies of the business.
  • Multi-company analysis – This analysis takes place when there is a comparison between two companies that belong to the same industry. This helps to determine the values of different companies and which ones are worthy of acquisitions. 

Ratio analysis – 

A ratio analysis course will empower you with all the information about stocks and shares that will guide a person to make the right decision about investments. A course on ratio analysis guides a person to do an in-depth analysis of the company’s financial statements and quantitative data. You will be able to finally determine if the company is worth investing in.

 

The course entails a lot of benefits as well. Apart from calculating the ratios of the company, it helps you analyze the pros and cons and then make an informed decision. A ratio analysis is also used to analyze the company earnings, the course helps you do the same. The topic mainly covers the different types of ratios like Activity Ratios, Solvency Ratios, Liquidity Ratios, Profitability Ratios, and Valuation Ratios.

Conclusion

The mission of these courses is to help students understand the finances of your organization and advance in their careers. It will give you the opportunity to understand, evaluate your company values, and then make an informed decision.

The two courses are different and unique in their own way, however, if combined, they can really polish your skills. Several online courses like the Financial Analyst Course and Financial Modelling Course will guide you further.

You can check out the Financial Analysis Prodegree in Collaboration with KMPG if you wish to acquire all the skills you will need as a financial analyst and learn techniques such as financial ratio analysis. Financial modelling, statistical functions, financial statement preparation, and basic accounting are some other common skills required by financial analysts.

Financial modelling: The breakthrough of the new generation finance trends

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Imagine a big manufacturing company with all its moving components – a team of administrators, a workforce that manufactures, a crew that procures the necessary raw materials, different units of regulators, marketing department, supply, and distribution chain.

Given the enormity of the company, gaining meaningful insights into its functioning and gauging its efficiency can be a daunting task. This is where financial modeling comes into play, and hence the growing popularity of financial technology courses among the newer generation of finance students.  

To cater to the growing demand of the online fintech program, Imarticus Learning has come up with a Financial Analysis Prodegree in collaboration with KPMG that offers young professionals a 180-hour financial planning and analysis course covering research on equity and valuation, financial modeling, and accounting. This article will give you an elementary understanding of financial modeling and how it will be a breakthrough for the new generation of finance trends. 

What is a financial model?

A financial model is a simple tool that utilizes any built-in spreadsheet software, such as MS Excel, to forecast the financial performance of any business in the future. It relies on the performance history and future performance assumptions to prepare a balance sheet, income, cash flow statements, and supporting schedules.

This dynamically connected financial model is called a ‘Three Statement Model’. It is the base on which we can build more advanced models, like Mergers and Acquisitions (M&A), Leveraged-Buyout (LBO), Discounted Cash Flow Analysis (DCF model), and other types of financial models.

How is a financial model used?

Company executives rely on the financial model to aid them in taking decisions regarding the analysis of the company finances. Some of the significant decisions that are based on such models are: 

  • Making organic business expansions
  • Divesting business units and assets
  • Raising and allocating capital 
  • Making acquisitions
  • Budgeting and forecasting 
  • Management accounting
  • Valuing a business
  • Financial statement analysis

A step-by-step guide of building a financial model

While building a financial model requires lots of relevant data, assessing them and understanding them comprehensively, using financial tools, and auditing and stress-testing. However, a generic but step-by-step breakdown of building a financial model is provided below:

  • Every financial model begins with an in-depth study of the past financial statements and reverse-engineering the data to forecast gross margins, fixed costs, revenue growth rate, fixed costs, among others.
  • The next step is to start an income statement to compute the revenues, operating expenses, gross profit, etc. With that, you can also begin to fill in the balance sheet.
  • The third step compromises building supporting schedules for capital assets like Property, Plant & Equipment (PP&E), and also for interest and debt.
  • Use the reconciliation method to build the cash flow statement by adding depreciation and starting with the net income.
  • After completing the Three Statement Model, perform the Discounted Cash Flow (DCF) analysis by evaluating your business value and calculating free cash flow.
  • Assess the risk of an investment or plan your business accordingly with different assumed scenarios by adding sensitivity analysis.
  • Build graphs and charts of the financial model to communicate the output with the clients.
  • Test your financial model by stress-testing it against extreme scenarios to check whether your model behaves as expected.

Conclusion

Even a cursory understanding of financial modeling will help you understand that it is imperative for most modern business giants. A global pandemic, recession, inflation, and other economic factors have already bolstered the need for financial models to grow businesses. Enroll in the  Financial Analysis course of Imarticus Learning to join the new generation of finance trends.