Financial Analyst
See: Sellside Analyst. See: Buyside Analyst.
Like ice cream, financial analysts come in many flavors, but all do the same thing: They analyze money. (Okay, so ice cream doesn't do that.) Is so-and-so a good credit risk? Is this company worthy of a B rating in its bonds? Is this stock a buy, a sell, or a hold? Does my own mother understand what I do?
The lion's share of financial analysts work on Wall Street for "buy" or "sell" side firms. A buy side firm is a mutual fund, hedge fund, or other investment entity charged with managing money for an individual. The sell firms are the stock brokers who sell money for a living. And you have to understand this maybe subtle but very key difference to be able to understand what financial analysts do—or rather, the perspective they have when they're doing their jobs.
Financial analysts on the buy side are trying to find a rationale to buy something—to figure out if or how a given investment opportunity is cheap. Is the world just panicked for no good reason? Is there something fundamentally wrong with this company? Is it actually just fairly priced for all the risks involved?
Financial analysts on the sell side get paid in large part based on the volume of commission dollars flowing through the desk that they cover. So if you follow the media industry for a large investment bank, much of your power and pay will derive from the buy side firms simply liking the work you do. You might even get a "Good Job!" sticker.
The buy side firms pay the investment bank by trading through it. They could buy or sell Disney shares from a hundred different players, but they chose your bank because they like the financial analysis you did on the new Nairobi theme parks and ESPN 37.
There's a subtle but important difference here in the impetus behind the reports financial analysts create. One is about stock ownership; the other is about transacting. The day is spent largely making models based on meetings with management, pasted over a "macro" picture for how the world is doing.
Financial analysts want to run money—that is, they want to become portfolio managers. (See: Mutual Fund Manager and Hedge Fund Managers for details.) Ultimately, they want to make money run right into their wallets.
You could try to argue that people get into this biz because of the love of fierce competition, or because they like the challenge of predicting in what directions the financial world is going to turn, but really, they just want to make money.
And there's no shame in that. Money takes care of your family. Money keeps you out of debt and relieves the stress of worrying how you're going to pay your mortgage or other bills. Money buys fancy Italian cars. Okay, so maybe that last example wasn't quite as noble as the others, but you get the idea.
Because money is the be-all-end-all, practically every moment of a financial analyst's waking life—or of their working life, anyway—is spent with that goal in mind. This means that you won't be strolling into the office at 9:30 am and skipping out at 4:00 pm when you think the boss isn't looking. The more hours you put in, the more money you make, so you're going to put in a lot of overtime.
Don't expect to see your spouse and kids much. It's going to take a Herculean effort on your part to make yourself a major part of their lives so they don't grow up resenting you. (Little known "fact": Hercules was both a tremendous father as well as a financial analyst. He's more famous for his physical exploits, however.)
There is the chance to make some major moolah in this gig...and that's really all it comes down to. If you struggle (at least relative to others in your profession) and can't seem to get ahead, you're a failure. If you have more money than you know what to do with, you're a success. It's as simple as that.
There's no Financial Analyst of the Year Award; no monument will be constructed to memorialize your achievements. You work for the allure of the dollar alone. Actually, the allure of many, many dollars. Analyze that.
Related or Semi-related Video
Finance: What are Valuation Analysis, Fo...4 Views
Finance Allah shmoop What are valuation analysis formats and ratios
It's a thing dot com It sells Who's ima wa
s Okay but investors want to know what percentage of
the company there ten million bucks will buy So somebody
has to know what it's worth and why There has
to be some exercise here which delivers an actual number
that says at this moment it's a thing dot com
is worth X Well in real life the most sophisticated
valuation format lives in applying a discounted cash flow analysis
model Yeah go watch are most excellent video directed by
Martin Scorsese on that topic If you haven't seen it
it won the Golden Mullah Award back in two thousand
eighteen Well if you haven't seen it the notion is
that company's heir valued as a stream of their cash
profits like into the future Cash profits Five million next
year Ten million The next eighteen million accents sold for
one hundred million the next Then all those cash flows
or discounted back or divided by one plus the risk
free rate I'ii uh you know the rent You could
get on your cash just by investing in U S
Government bonds plus risk Got it So that is risk
that the ten million of cash profits doesn't in fact
happen in real life like you're taking more risk than
you are investing in government bonds when you invest in
equities like this right So if the risk free rate
is in a three percent like a five year T
Bill or something like that then you might pile risk
on top of that of saying six percent or ten
percent or twenty percent a year And the certainty of
that ten million box in profits in two years changes
a lot and then that hundred million at the very
end Well it might have huge discounting like be divided
by one plus the risk free rate plus a huge
risk premium act on in the denominator making one hundred
million a very small number like it's very risky So
maybe that discount rate ends up being I don't know
say thirty percent added to the risk free rate and
it's four years out So it's taken to the fourth
power Yeah a lot of discounting that it looks like
this You got one point Oh three plus point three
Oh it's one point three three then to the fourth
power that you're going to divide into one hundred million
and give that a huge haircut But okay okay this
is a sophisticated Wall Street e way of valuing companies
There are simpler methods Multiples of sales is another one
that while people use And yes of course we have
an entire video on that one as well A company
has highly volatile profits like this is kind of company
that would use a multiple of sales valuation positive twenty
percent margins in great times negative fifteen percent margins in
bad times and an average over a decade of statement
of ten percent margins So on five hundred million of
sales it might on average have fifty million in net
profits and the average grows over time But the company
quote should unquote trade at a market multiple minus two
turns or something like that Or set another way if
the S and P five hundred straining at sixteen times
earnings well then maybe this crappy company that's highly cyclical
should trade it fourteen times Well fourteen times fifty is
seven hundred and note that that's about one point four
times sales Wealthy calculation then revolve around sales instead of
profits usually since year after year profits are yeah all
over the place where sales are relatively steady like they'll
go up three percent in Goodyear and down to percent
of badly or something like that So that's a multiple
of sales valuation format It's often used for early stage
companies who really don't have profits and would reinvest all
their free profits or cash into growth anyway So you
can imagine the same system applying to things like multiples
of gross margin for multiples of operating margin like pre
tax profits With the basic idea being that the closer
you get to the top line sales number usually the
less volatile those numbers on a year in year out
basis are and then the easier the valuation remains to
dial in structurally well cash flow multiples are good delimit
er zzzz Well think about how quote phantom depreciation unquote
works in clouding the true earnings Pictures of things like
a factory that cost a billion bucks to build and
is being depreciated to zero over ten years might carry
an earnings hit to the income statement of well a
hundred million bucks a year in straight line appreciation It
takes the eighty million in profits the company is making
toe being an accounting loss of twenty million dollars So
how does that work Well you thought you were making
eighty million in net profits but it turns out you've
got to depreciate one hundred million for that factory You
lavished Tobi right Well the cash the company produces is
its cash flow like from progressive Yet you know her
and backing out that appreciation gives a much clearer picture
of the company's expected profit ability in the future i
e Its value meaning you pay a whole lot more
attention to that eighty million dollars in profits Then you
do the twenty million in losses But this valuation method
becomes extremely useful in cases where that factory being appreciated
to zero in ten years will in fact last more
like forty years and even then not be worth zero
So we have discounted cash flow We have multiple of
sales We have multiple of cash flow And then of
course the stalwart multiple of earnings or price to earnings
ratio as a basic valuation format or racial or structure
that drives the lives of oh so many investments P
ratios are probably the most common evaluation metric Whatever dot
com will earn after everything appreciation included a dollar next
year a dollar twenty the following year and a dollar
forty the next It trades this moment for twenty bucks
a share or twenty times this year's earnings That's twenty
over one point two times next year's earnings twenty over
one point four times at the following years And yet
you get the picture It looks like that Well the
price to earnings multiple usually goes down over time because
well most companies actually grow their earnings over time The
Gatun here is that companies often carry cash and or
debt So if a company has ten dollars a share
in debt and four dollars a share in cash well
then its price to earnings ratio is while still twenty
But it likely has Mohr volatilities in its movements as
the debt is well kind of like gasoline on a
fire when things go well or poorly So yeah those
were the most common methods of assessing the value of
a company or a stock and you've got to take
all of them with many grains assault Although uh well
It's much easier if you just have one of these 00:06:07.671 --> [endTime] things to assess
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