You may have heard the term “financial analyst,” but exactly what do they do? Specifically, what is the purpose of writing a financial analysis of a company in the first place?
Great question!
For the person who wants to dive into a company and how it works, this report familiarizes them with the firm, their operations, how profitable they are, and the risks a person might face if they invest money in the company (whether buying stock in the firm or bonds–loaning the company money–issued by the brand). Ultimately, a financial analyst’s goal with a report is to leave the reader with an actionable recommendation. For the writer, it can be a useful tool to increase self-knowledge about the company or prove to their clients and industry insiders both that they’re familiar with the brand., the industry in which they compete, and overall markets. The practice of analyzing companies improves the analyst’s skills in finding quality companies about which to write and in which to potentially invest. Furthermore, the simple act of writing multiple papers will grant the writer experience and make it that much easier to do in the future.
Thinking about writing your own analyst report? Here are some best practices:
1. A Quality Financial Analysis Should Include an Executive Summary
Starting from the top, the executive summary provides an easy-to-read, high-level overview of the company, which encapsulates the data presented in the rest of the report. This section includes summaries of the company’s mission, history, current performance, competition, market situation, and outlook. This is the opportunity for the writer to lay out the “agenda” for the analysis and set expectations for the reader.
2. Business Overview
After the executive summary, a quality analysis generally begins with a description of the business to help investors (and readers alike) understand the company, its industry, its mission, and any advantage or disadvantage it has relative to its competitors. These details play a vital role in helping investors understand if a business can be profitable or not. A company’s annual report with the Securities and Exchange Commission (SEC) offers a perfect starting point to start digging into the business.
3. Analyze the Existing Financial Statements
Now to the meat and potatoes of the report… An important responsibility of any financial analysis writer is to evaluate the company’s financial situation. This is accomplished by examining the company’s financial statements (balance sheet, income statement, statement of cash flows, etc.). If the writer is especially ambitious, he/she might even listen to a company’s conference calls,. The writer/investor can get a front row seat to when management shares the results for the most recent quarter/year and forecasts future results. The simple act of tuning into this quarterly event will give the writer an advantage over the majority of writers, who either will not or cannot listen in. Writing a high-quality financial analysis will take into account all available information, and quarterly conference calls are chock full of valuable company information, straight from the horse’s (management’s) mouth. They typically will forecast future earnings, address points of concern, and answer shareholder questions.
4. Industry Analysis
No company operates in a vacuum, right? Even the largest companies in a particular industry has competition. Because of this, a quality financial analysis will examine the competition. Whether you write your own financial analysis or hire someone to write papers for you, it’s important to make sure that you’re comparing this company to it’s competitors and highlighting strengths and weaknesses. This is known as the “industry analysis”, and includes a look at the competition to find out where the company stands. This section includes the company’s financial health to its competition. Furthermore, it looks at the firm’s market share, which can give readers perspective about the company’s size relative to its competition.
5. Financial Ratios
Financial ratios serve to reveal various comparative statistics – such as the company’s liquidity, debt load and efficiency. Some common ratios include: 1. The current liquidity ratio is referred to as the ratio of the firm’s current assets to its current liabilities. 2. The debt ratio is the ratio of the firm’s total debt to its total equity3. The return ratio weighs a company’s profits against its shareholder’s equity. 4. The price to earnings ratio can be computed by dividing the present market price per share by the earnings per share, which is often-referenced by investors.
The financial ratios are standard among all companies, and, therefore, give the reader/investor an apples-to-apples comparison when comparing companies’ stocks.
6. Investment Thesis
“What Is an Investment Thesis?
An investment thesis is a reasoned argument for a particular investment strategy, backed up by research and analysis. In the financial world, an analyst may prepare a formal document outlining an investment thesis for presentation to potential investors or an investment committee.” (source)
The investment thesis is useful for investors to evaluate investment ideas and identify the ones that are most useful to help them achieve their investment goals.
In summary, a financial analyst report is useful for investors to evaluate the attractiveness of investing in a particular company. Through thorough analysis of the company’s finances, detailed comparison of the industry and competition, and examination of the company’s position in the industry, the writer can make a strong argument to the reader whether or not a company makes sense for investment.
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