Question

I forgot many things I learned in my finance classes in college. What topics in finance and excel skills do I need to focus on to become a financial analyst? If you can, give me a list and ways I can study/practice.

Answer 1

Topics in Finance you need to Focus on:

(1) Explaining financial modelling

It’s all about getting your basics right. You ought to know all the features of financial modelling, its various applications and the important points that need to be considered. This also includes the best practice for financial modelling. You should have conceptual clarity about the objectives that can be achieved via financial modelling.

(2) Knowledge of valuation technique

Many-a-time recruiters ask you about choosing a single evaluation technique. There can be no definite answer to this. It all depends on the situation and your perception of valuation. However, you need to be very confident about the valuation technique you choose and be able to explain the reason. It is always a good idea to do some quick calculation and demonstrate your answer with examples. This will convince the employers about your depth of knowledge and quantitative skills.

(3) Ratio Analysis

Ratio analysis plays a very important role in financial analysis. Knowledge of ratio analysis does not mean just cramming the formulas. Application is more important. You need to know how to compare ratios across companies and industries and arrive at a conclusion. Also, certain ratios are more important for some sectors while others are not. Recruiters expect you to know which ratios to pick for comparison when you are working on a particular sector.

(4) Impact of changes in current assets on balance sheet

Current assets and liabilities such as accounts receivable/ payable and inventory are important part of the Balance sheet. Any changes in them directly impacts the working capital cycle. Hence, it is important to understand the effect of changes in accounts receivable or payable on the business and cash.

(5) Cash flow analysis

Cash flow is a very important financial statement. The inflow and outflow of cash and the situation of the company speaks volumes about its financial situation. As a financial analyst you need to know the nuances of cash flow. Many times a firm may show net loss but still have a cash surplus, similarly there may be instances of net profit but a cash deficit. There are so many adjustments like non-cash expenses, bad debt, and increase/decrease in accounts receivable/payable which impact the cash flows. You need to be well versed if tricky questions like “Can a company have positive cash flow even if its situation is bad or vice versa?” are thrown at you.

(6) CAPM model including systematic and unsystematic risk

When it comes to valuation, the Capital Asset Pricing Model (CAPM) is of utmost importance. The concept and calculation of alpha, beta, systematic and unsystematic risk must be on your fingertips. You can be asked to explain the steps taken in calculating the risk element or give examples of systematic and unsystematic risk in real life business scenarios.

(7) Conceptual clarity on DCF, FCF

Discounted Cash Flow (DCF) and Free Cash Flow (FCF) are the penultimate stages of valuation and a financial analyst needs to have full clarity on this. You need to be aware about the difference between Cash Flow and Free Cash flow. More importantly, you need to know how Free Cash Flow is calculated and how it is relevant in valuation of a business. How to choose an appropriate discounting factor (weighted average cost of capital) and valuing a company is a vital topic for preparation.

(8) Sector-specific knowledge

Most of the brokerages and KPOs have dedicated analysts for each sector. So, if the interview is for Financial Analyst of a particular sector, you can expect the questions to be very sector specific. Hence you need to prepare on revenue drivers for the sector, specific research metrics and suggest the most suitable valuation method for the sector. For some it may be relative valuation, for some it may be Discounted Cash flow while for others it may be Sum of the Parts method. Along with this, you have to be updated with the latest happenings in the sector as this might impact the company’s performance and valuation.

(9) Macroeconomic Developments

Very often candidates face questions like “What would suit a country more if it is faced with inflation- A hawkish stance on interest rates or Dovish?”

Apart from the knowledge of excel, valuation or sector, a good financial analyst is expected to be aware of the developments in India as well as global economy. Developments like Fed’s decision on US interest rate, China’s political and economic comebacks, the price of oil and gold as well as developments in the Eurozone and Gulf Countries need to be tracked on a regular basis. Closer home, one needs to be well-versed with the Union Budget, policy changes, interest rate changes, inflation rate, taxation regime etc.

(10) Impact of currency depreciation on sectors

Movement of currency and its impact on various sectors is a topic that many employers like to question upon. Especially if the company is export or import oriented. Study the currency movement trend for the past one year and see which sectors have been impacted and how. Analyse what are the factors that have led to the volatility and try to form an opinion as to how things will fare in the future.

Excel Skills you need to Focus on:

Pivot Table Analysis

Pivot tables and pivot charts allow accounting and finance professionals to gain meaningful insights from data. They can access multiple information sources and support a deep dive into the data. Being able to perform a pivot table analysis should be seen as an essential Excel skill for anyone working in a finance-oriented role.

Charts and Visualizations

At times, trying to derive meaning from rows and columns full of numbers is a challenge, particularly if you are dealing with a substantial amount of data. Charts and visualizations help make the information more accessible by creating a graphical presentation of the data. This not only helps with analysis but also with showing the data to another party, especially those who may not be as familiar with financial concepts.

Conditional Formatting

With conditional formatting, you can adjust the look of particular cells based on whether they meet certain conditions, making it easier to track critical details or examine the spreadsheets for specific information.For example, outgoing payments (represented by negative amounts on a balance sheet) could be displayed in red, meaning the number is negative. Similarly, approaching due dates can be color-coded or bolded to draw attention to the cells.

Ultimately, all the Excel skills listed above should be considered must-haves for any accounting or finance professional.

All the Very Best.