Financial Analytics

Finance

  • Corporate Finance: Business function that manages funding sources, capital structure, and investment decisions with the goal of increasing the company’s value for shareholders, performed internally

    • Working Capital: Available capital that a company can use in day-to-day operations

    • Liquidity: Availability of cash to meet company obligations

    • Solvency: Ability to pay company debts when due

  • Investments: Acquisition and disposition of assets with the objective of generating income or profit

    • Performed both internally and externally

  • Financial Markets and Institutions

    • Financial Markets: Markets for selling various types of investments such as stocks and bonds

    • Financial Institutions: Institutions that work in financial markets, such as banks, investment companies, and brokerages

Obtain the Data

  • Stock-return data

  • Summarized finacial data

  • Financial statement data

    • EDGAR

      • Electronic Data Gathering, Analysis, and Retrieval System

      • Collects, validates, indexes, and serves as a repository for all forms submitted to the SEC

    • XBRL

      • Extensible Business Reporting Language

      • Required of publicly traded companies by the SEC

Diagnostic Financial Analytics

  • Finding anomalies and outliers

  • Drill-down analytics with DuPont Analysis

    • Three ratios are used to help explain returns on stockholders’ equity

    • Profit Margin: Net income divided by total sales revenues. Extent to which a company earns income on each sales dollar

    • Asset turnover: Sales divided by total assets. Measure of efficiency

    • Financial Leverage: Total assets divided by stockholders’ equity. Extent to which assets are purchased using debt

  • Drill-down analytics with Sharpe Ratio

    • Ratio of average return earned in excess of risk-free rate to a unit of volatility or total risk

Predictive Financial Analytics

  • Altman’s Z and Bankruptcy Classification

    • Z=1.2x1+1.4x2+3.3x3+0.6x4+1.0x5Z=1.2x_1+1.4x_2+3.3x_3+0.6x_4+1.0x_5

      • x1 = Liquidity

      • x2 = Long-term profitability

      • x3 = Short-term profitability

      • x4 = Long-term solvency

      • x5 = Asset Efficiency

    • Below 1.8 is distress

    • Above 3 is safe

  • Loans

    • Evaluation of borrowers based on creditworthiness to decide whether or not to give a loan

Prescriptive Financial Analytics

  • Net Present Value (NPV): Present value of cash inflows minus present value of cash outflows

    • Present Value = CFt(1+r)t\frac{CF_{t}}{\left(1+r\right)^{t}}

  • Internal Rate of Return (IRR): Discount rate that makes a project’s net present value equal to zero with present value of cash outflows equal to present value of cash inflows

Report Results

  • Line graphs to compare performance over time

  • Research Reports

  • Earnings Forecasts

  • Line graphs of sensitivity analysis