Question 1

What is financial analysis?

Accepted Answer

Financial analysis is what analysts do when they review data and compile reports to determine how a business is performing. Employers and clients rely on analysts to make recommendations to improve their ventures. The analysis can be broad and encompassing all of an organization’s business activities. On the other hand, it might be more selective, with the goal of focusing on a singular aspect, such as a specific project or a budget. Often, the purpose is to determine profitability and also whether an enterprise warrants further investment. When conducted internally, analysis can provide information for the managers or owners of an organization who need to make decisions regarding the future of the enterprise. Externally, analysis can also reveal insights to curious prospective investors.

Question 2

What are the different types of financial analysis?

Accepted Answer

Financial analysis is often termed “vertical” or “horizontal,” depending on whether it involves comparing the organization’s financials against competitors or an internal look at financial data to measure an organization's growth. It can focus on leverage, comparing debt against equity, or measuring growth rates to provide projections. Analysts can generate reports regarding an organization’s profitability or liquidity, and they can conduct studies that determine an organization’s efficiency or market valuation. Additionally, analysts may study cash flow or rate of return, and they may run different models, or scenarios like sensitivity analysis, to attempt to make predictions and measure risk. You can group these various types under two main types: fundamental analysis and technical analysis.

Question 3

Why is financial analysis important?

Accepted Answer

Financial analysis reveals whether an organization is operating and can continue to operate at a profit. So it is a crucial part of the decision-making process for organizations interested in keeping their clients. It is also vital for investors looking for suitable investment opportunities. As you collect data to generate reports, you can evaluate trends, create policies, and define long-term projects and budgets. Without proper analysis, you could make these decisions blindly or based on instinct. A solid analysis provides the decision-makers with a more concrete foundation on which to base their decisions. Besides decision-making, financial analysis also augments an organization's problem-solving capabilities, minimizing downtime and maximizing efficiency to a reasonable degree.

Question 4

What skills do I need to be a financial analyst?

Accepted Answer

If you want to be a junior analyst, you will need skills to sift through and gather relevant data, create models, and update spreadsheets. If you are looking to be a senior analyst, you will need skills to develop investment strategies, present findings to management and/or investors, and suggest marketing ideas. For either position, a keen understanding of math and finance as well as accounting and data analysis would be helpful. If you would like to build on those skills or are interested in learning them, you can start with an online Udemy course. Although not necessary when first entering the work field, you may acquire a license to become a certified analyst in some countries. Minimum requirements for such a license may include a degree in either finance or accounting, a certain amount of work experience, and a passing grade for a qualifying exam.

Question 5

What are the most common tools for financial analysis?

Accepted Answer

Financial analysis tools are methods for assessing and interpreting financial statements for decision-making. Four of the most common tools are common size statements, which present data in the format of percentages; comparative financial statements, which can have data presented in percentages or dollar amounts and are used to analyze changes in various components of the statement for displaying trends; ratio analysis, of which there are multiple variants, that are used to determine various facets of an organization’s finances; and benchmarking, which involves comparing actual performance with previously established targets to determine if targets are being reached.

Question 6

What are the best certifications for financial analysts?

Accepted Answer

Three of the most widely recognized certifications are Certified Public Accountant (CPA), Certified Financial Planner (CFP), and Certified Management Accountant (CMA). You can then choose to go on to become a Chartered Financial Consultant (ChFC), a Chartered Financial Analyst (CFA), or a Chartered Investment Counselor (CIC). If you’re looking for a specialized field, you may want to consider being a Financial Risk Manager (FRM), a Chartered Life Underwriter (CLU), a Chartered Alternative Investment Analyst (CAIA), or a Chartered Mutual Fund Counselor (CMFC). The option you choose will indicate your level of education and area of expertise to prospective clients or employers.

Question 7

What are the differences between buy-side, sell-side, and investment banking firms?

Accepted Answer

Buy-side firms are firms that purchase financial securities and can include hedge funds, investment managers, and pension funds, for example. Entities that are involved in making investment decisions are on the buy-side of the industry. On the other hand, a sell-side firm sells or issues financial securities that can be traded in and may include advisory firms, investment banks, and corporations. Those on the sell-side are those that advise and facilitate the buy-side in making investments. Investment banking firms dominate the sell side of the industry, selling stocks and bonds to both institutions and individual investors.

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