How To Create Financial Models With Excel


For all of the big subscriptions and analytics programs, a huge amount of the work that Wall Street analysts and managers do is done on the Excel software that you have on your own computer. With just a little bit of effort, you too can create a range of financial and analytical models, and investing the additional time and energy to study about macros can give you even more options.
The basis of what whole sub-side analyst (and many buy-side analysts) does is his or her a lot of a company’s financial models. These are simpel spreadsheets that hold (and help form) the analyst's aspect on the fair financial results for the company in question. They can be specifically detailed and hard, or relatively childish, but the model will never be any exceptional than the quality of the work that goes into forming the estimates. In other words, fancy guesswork is still just hint.

nSEE: The Impact Of Sell-Side Research :

Financial Models are generally created with the x-axis plate as the time (quarters and full years) and the y-axis breaking down the results by line-item (i.e., revenue, cost of goods sold, etc.) It is not at all unusually to have a independent sheet generating the revenue estimate; whether that is a per-segment basis for a large mixed like United Technologies (UTX) or broad Electric (GE) or a more simple units-sold-and-predict selling price for a smaller, simpler company.
For these models, the model-builder needs to input estimates for positive items (i.e., revenue, COGS/gross margin, SG&A/sales) and then make clear that the mathematical formulas are correct. From this base, it is also viable to build pratically and inter connected models for the income statement, balance sheet and cash flow statement, as well as macros that allow investors to make "bull/bear/base" scenarios that can be changed with a click or two.
Although most often refuse it, specially few beside analysts absolutely build their own company models from scrape in my experience. Instead, they will essentially copy the models built by sell-side analysts and "stress test" them to see how the numbers respond to a variety of circumstances.

Valuation Models :

Even if you do not create your own company models, you should seriously view building your own valuation models. Some investors are fullfiled with using simple metrics like price-earnings, price-earnings-growth or EV/EBITDA, and if that works for you then there's no reason to change. Investors who want a more accurate approach, though, need to consider a discounted cash flow model.

Discounted Cash Flow (DCF) :

DCF modeling is elegant much the gold standard for valuation and multiples of books have been written on how free cash flow (operating cash flow minus capital expenditures at its simplest level) is the best proxy for corporate financial performance. One row will serve to hold the year-by-year cash flow estimates, while rows/columns beneath can hold the growth estimates, discount rate, shares outstanding and cash/debt balance.
There requires to be a openting approx for "Year 1" and that can come from your own company financial model or sell-side analyst models. You can next estimating the growth rates by creating individual year-by-year estimates or use "bulk estimates" that apply the same growth rate for Years 2 to 5, 6 to 10, 10 to 15 and so on. You then need to input a discount rate (a number that you can calculate with the CAPM model or another method) in a separate cell, as well as the shares outstanding and net cash/debt balance (all in separate cells).
Once this is done, use your spreadsheet's NPV (net present value) function to process your cash flow estimates and discount rate into an estimated NPV, to which you can add/subtract the net cash/debt, and then divide by the shares outstanding. As part of this process, do not forget to calculate and include a terminal value (most analysts calculate explicit cash flows for 10 or 15 years and then apply a terminal value).

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