Financial Analysis
by brainupgrade-in
Analyzes financial statements, calculates key metrics, and generates investment reports. Use when reviewing earnings, building DCF models, or comparing company financials.
Skill Details
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name: financial-analysis description: Analyzes financial statements, calculates key metrics, and generates investment reports. Use when reviewing earnings, building DCF models, or comparing company financials.
Financial Analysis Procedures
Overview
This skill provides systematic approaches to analyzing financial statements, calculating key performance metrics, and generating comprehensive investment reports.
Key Metrics to Calculate
Profitability Ratios
| Metric | Formula | Interpretation |
|---|---|---|
| Gross Margin | (Revenue - COGS) / Revenue | Higher = better pricing power |
| Operating Margin | Operating Income / Revenue | Operational efficiency |
| Net Margin | Net Income / Revenue | Bottom-line profitability |
| ROE | Net Income / Shareholders' Equity | Return on shareholder investment |
| ROA | Net Income / Total Assets | Asset utilization efficiency |
| ROIC | NOPAT / Invested Capital | Return on all invested capital |
Formulas:
Gross Margin = (Revenue - COGS) / Revenue * 100
Operating Margin = Operating Income / Revenue * 100
Net Margin = Net Income / Revenue * 100
ROE = Net Income / Average Shareholders' Equity * 100
ROA = Net Income / Average Total Assets * 100
ROIC = NOPAT / (Total Debt + Shareholders' Equity - Cash) * 100
Valuation Metrics
| Metric | Formula | Use Case |
|---|---|---|
| P/E Ratio | Price / EPS | Relative valuation |
| EV/EBITDA | Enterprise Value / EBITDA | Acquisition valuation |
| P/B Ratio | Price / Book Value per Share | Asset-heavy industries |
| P/S Ratio | Price / Revenue per Share | Early-stage/growth companies |
| PEG Ratio | P/E / EPS Growth Rate | Growth-adjusted valuation |
Enterprise Value Calculation:
EV = Market Cap + Total Debt - Cash and Equivalents
EV = Market Cap + Preferred Stock + Minority Interest + Total Debt - Cash
Liquidity Ratios
| Metric | Formula | Healthy Range |
|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | 1.5 - 3.0 |
| Quick Ratio | (Cash + Receivables + Marketable Securities) / Current Liabilities | 1.0 - 1.5 |
| Cash Ratio | Cash / Current Liabilities | 0.5 - 1.0 |
Leverage Ratios
| Metric | Formula | Interpretation |
|---|---|---|
| Debt/Equity | Total Debt / Shareholders' Equity | Lower = less risk |
| Debt/EBITDA | Total Debt / EBITDA | Industry-dependent |
| Interest Coverage | EBIT / Interest Expense | Higher = safer |
DCF Model Structure
Step 1: Project Free Cash Flow
Free Cash Flow = EBIT(1-Tax Rate) + Depreciation - CapEx - Change in Working Capital
Projection periods: 5-10 years
Terminal value: Gordon Growth Model or Exit Multiple
Step 2: Calculate WACC
WACC = (E/V * Re) + (D/V * Rd * (1 - Tc))
Where:
E = Market value of equity
D = Market value of debt
V = E + D
Re = Cost of equity (CAPM)
Rd = Cost of debt
Tc = Corporate tax rate
Step 3: Discount Cash Flows
DCF Value = Sum of [FCF_t / (1 + WACC)^t] + [Terminal Value / (1 + WACC)^n]
Report Structure
1. Executive Summary (1 page)
- Investment thesis (bull/bear case)
- Target price and current price
- Key catalysts and risks
- Recommendation (Buy/Hold/Sell)
2. Business Overview
- Company description
- Revenue segments
- Competitive landscape
- Management assessment
3. Financial Performance Analysis
- Revenue growth trends (3-5 years)
- Margin analysis
- Cash flow generation
- Capital allocation
4. Peer Comparison
| Metric | Company | Peer 1 | Peer 2 | Industry Avg |
|---|---|---|---|---|
| P/E | ||||
| EV/EBITDA | ||||
| Gross Margin | ||||
| Revenue Growth |
5. Valuation Assessment
- DCF analysis with sensitivity table
- Comparable company analysis
- Precedent transactions (if M&A relevant)
6. Risk Factors
- Industry risks
- Company-specific risks
- Macroeconomic factors
- Regulatory considerations
7. Investment Recommendation
- Price target methodology
- Upside/downside scenarios
- Timeline for thesis to play out
Output Format Requirements
Always include:
- Data tables with key metrics
- YoY (Year-over-Year) comparisons
- QoQ (Quarter-over-Quarter) trends
- Industry benchmark comparisons
- Clear source citations for all data
- Date of analysis
Red Flags to Watch
- Declining margins despite revenue growth
- Increasing receivables faster than revenue
- Negative operating cash flow with positive net income
- Frequent accounting policy changes
- High executive turnover
- Unusual related-party transactions
- Goodwill larger than equity
Industry-Specific Considerations
| Industry | Key Metrics | Unique Factors |
|---|---|---|
| Tech | ARR, CAC, LTV, Net Retention | Scalability, TAM |
| Banking | NIM, NPL Ratio, CET1 | Interest rate sensitivity |
| Retail | Same-store sales, Inventory turns | Seasonality |
| Healthcare | Pipeline value, Patent cliff | Regulatory approval |
| Real Estate | FFO, NAV, Cap Rate | Interest rate impact |
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