What does a Financial analyst do?
A financial analyst is anyone who guides his clients in terms of Planning(research &data analysis) and execution (sales, trading) of financial decisions, which can be related to Funding(debt, equity), Investing(debt, equity) or Risk management. The clients could be a Commercial Bank, NBFC, Treasury, Investment bank, Hedge Fund, Private Equity, Venture Capital, Wealth Management, etc.
I know this is a lot to digest. Let’s make things interesting by taking examples from the lives of financial analysts to analyse the problems that a financial analyst faces and categorise them under different sub-headings. We know you are going to love just give it a read.
1. Capital Budgeting:
Let’s consider a scenario in which a solar panel manufacturer is planning to enter into the Indian market and wishes to identify three states where it should enter first to maximise its shareholders’ wealth. He has appointed you as in charge of guiding him in his decision. How should you go about making this decision?
The moment we start thinking about this problem, we find that there are endless possibilities and factors to consider to reach a decision. We would need to analyse the geographical position of the states to get an estimate about the amount of sunlight received, demand and supply of electricity even the availability of land and many other things. This is where a financial analyst beautifully considers all these points and comes up with an optimal solution to this problem. Doesn’t this sound interesting to you?
Now let’s discuss a more general problem that you might have faced or would be facing shortly, which is about “Term Insurance.”
2. Time Value of Money:
Let me put this in a form of a small game, in which you are given two choices, you are supposed to choose one out of those which you feel would be the best choice. Let us know if you found it interesting.
Let’s suppose that you decided to buy term insurance. The company suggested two options to make the payments, either you pay Rs. 91,000 annually for 75 years OR, pay Rs. 3.15 lakhs for 10 years, and the company also mentioned the following: “Clearly, you can save Rs. 37 lakhs if you choose the 2nd option”. Now decide what you would choose? Take your time before jumping to the solution. (Do comment if you need the detailed mathematical explaination.)
It is a great marketing strategy, but one thing that is not taken into account here is “Time Value of Money”. Once we consider this, we find that the 1st option is what you should ideally choose as suggested by the financial advisor.
3. Risk Management:
An airline company is afraid of fuel price risk. Given that the holiday season is approaching in the next three months, it expects a significant increase in air travel demand. It wishes to mitigate that fuel price risk, and hence, it approaches a financial analyst. A financial analyst(Investment Bank) takes the responsibility to minimise risk for the airline company. He does this by spreading the risk among different institutions and minimising the risk. It is a broad topic. Let’s not get into this for the time being.
4. Equity Research:
A mutual fund’s portfolio manager has asked his retail sector analyst to consider whether they should add Reliance Retail Ltd. to their large-cap equity portfolio. The role of an analyst is to prepare an equity research report analysing the intrinsic valuation of the stock. How would he go about it?
In this case, the analyst would need to look into the company’s fundamentals, analyse the balance sheet, profit and loss statement, cash flow statement, plans of the company, along with the management of the company, and technically analyse the company’s performance over the years and do valuation of a company. This in itself is quite an interesting analysis to do.
5. Credit analysis:
Let’s suppose a small business owner has approached HDFC bank for a loan of Rs. 50 lakh for a term of 5 years, in order to expand into a new factory to meet increasing demand. You are the bank manager who would have to do the credit analysis to decide an appropriate interest rate and collateral amount. What would you do?
Now the bank manager has to decide an appropriate interest rate that has to be charged. What if the entire business fails? How would the bank recover its money if the person defaults or something else happens? Etc. So these decisions come under credit analysis.
This was a brief description of problems that a financial analyst encounters. I hope you have got a slight idea about each of these roles. As you have seen, these problems can be as simple as choosing among different term insurances and as complex as managing risk for the whole company or as popular as doing equity research etc. We hope you found these examples interesting, and through these, you would have got an idea about “ what does a financial analyst do?”. Do like the post if you feel this was insightful, do follow us for similar blogs and do not forget to comment your views on this.
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