Financial Analysis Techniques

Pick a company Read last 3 annual reports Read last 12 earnings call transcripts Find relevant information on the company Calculate key ratios for it Repeat for another company in the same sector See your understanding of the sector soar in a few weeks. Not sure how or where to start? 4 resources to help you 1) What to read in an earnings transcript  (using Eicher Motors as example) https://lnkd.in/gqaYwkNM 2) What to read in an annual report  (using Titan as example) https://lnkd.in/dtt674gu 3) Quick Financial Analysis using Screener  (using Ultratech Cement as example) https://lnkd.in/dFM9ypEa 4) Ratio Analysis: A Step by Step Guide in Excel  (Using SAIL as an example) https://lnkd.in/dd9HwiqC Subscribe to our channel for more such videos. https://lnkd.in/dR4nvGxd ------- Peeyush Chitlangia, CFA I help you build a career in Valuation and Investment Banking

The Bureau of Labor Statistics’ estimate of November consumer price inflation, which it released last week, is badly flawed. So much so, we constructed our own estimate of CPI inflation (courtesy Matt Colyar). Inflation didn’t decelerate to 2.7% on a year-over-year basis in November as the BLS reported, but instead remained unchanged at 3.0%. A big problem with the BLS estimate is the assumption that, in October, when it was unable to conduct its survey due to the government shutdown, prices for most (nearly all) goods and services remained unchanged. Of course, that didn’t happen. Thus, instead, we used data for various prices from private sources, where available, and our forecasts, where not, to estimate the October CPI. Another problem with the BLS estimate for November is that the survey for that month was delayed. This is especially true in November, given that pricing is typically stronger at the start of the month and weaker at the end, when the holiday shopping season begins in earnest. We estimate that core CPI inflation (excluding food and energy) in November was 2.9% year-over-year, but after accounting for this additional bias, it is likely also near 3%. All of this is on top of other measurement problems that have worsened significantly this year due to cuts to BLS funding and staff. Close to one-third of prices in the CPI are no longer directly measured, but imputed from other prices, up from one-tenth of prices at the start of the year. The noise in the inflation data is increasingly drowning out the signal. Abstracting from the noise, inflation remains uncomfortably high – well above the Federal Reserve’s inflation target – and shows no sign of abating. We will continue to update our CPI estimate at least until this time next year when we round-trip this October’s missing data.

Cash flow is not an afterthought. It is strategy. When I walk into a business, the first thing I want to see is how money actually moves. Not just on paper, but in practice. That story always tells me more than the P&L. At one company, we found that 40 percent of revenue was being collected in the last two months of the year. That meant the business was constantly strapped for cash even though it looked profitable on paper. The solution was to secure a new lending facility tied to receivables. That single move changed the entire trajectory of the business. In another case, a company wanted to accelerate growth, but the real bottleneck was suppliers who were paid in 60 days while customers were taking 90 days to pay us. We shifted terms, built a rolling 13-week cash forecast, and suddenly the company had room to invest in growth without taking on additional debt. I have learned that cash flow planning is not about being conservative. It is about being prepared. It gives you the ability to say yes when the right opportunity comes, or to survive when the unexpected happens. Profit is theory. Cash flow is reality. And if you want to be strategic, you start with reality. How often do you treat cash flow planning as strategy rather than just finance housekeeping?

Choosing the Right Valuation Method: A Practical Guide This decision tree covers all the main valuation methods in one diagram. Understanding when and how to apply the right valuation approach is essential for anyone in finance, investing, or corporate strategy. Across investment memos, fundraising decks, and strategic planning sessions, three valuation techniques appear time and again: 1. Discounted Cash Flow (DCF) DCF focuses on estimating a company’s intrinsic worth. You forecast future cash flows and discount them to present value using an appropriate discount rate. This method is most reliable when the business generates steady, foreseeable cash flows and when you have a solid grasp of its risk profile and growth trajectory. 2. Comparable Company Analysis (Comps) This approach benchmarks your company against publicly traded peers using valuation multiples like EV/EBITDA or P/E. It's a quick, market-driven way to assess value and is commonly used to validate other methods. However, its effectiveness depends on finding truly comparable companies. 3. Precedent Transactions By examining past acquisitions of similar companies, this method gives insight into what real buyers were willing to pay. It’s especially useful in mergers and acquisitions but can be skewed by factors such as deal-specific synergies, timing, or macro conditions. How to Decide Which Valuation Method to Use Enter the Valuation Decision Tree, a structured way to select the most appropriate method based on your company’s fundamentals: Is the business expected to continue operating? Is it more than just an asset-holding entity? Does it generate commercial goodwill? If you can confidently answer “yes” to all three, you're typically choosing between Income-based (like DCF) and Market-based (like Comps and Precedents) methodologies—illustrated at the bottom of the decision framework. This kind of structured approach is invaluable for financial analysts, corporate development teams, and anyone making valuation-based decisions. For a deeper dive, explore our courses at Corporate Finance Institute® (CFI).

EndGame Macro: A major shift is underway in global bond markets, and it’s starting in Japan. Japanese life insurers some of the largest institutional investors in the world are now selling Japanese government bonds (JGBs) at the fastest pace on record. Why? Because their duration gap has turned sharply negative for the first time in modern history. The duration gap measures the mismatch between the interest rate sensitivity of assets and liabilities. A positive gap means an insurer’s assets (like long-term bonds) respond more to rate changes than their liabilities (like annuity payments), which is generally manageable. But now, the gap has flipped to −1.48 years, the lowest on record. That means rising interest rates are hammering insurers: their liabilities are becoming more expensive faster than their assets can keep up forcing them to unwind long-duration holdings to stop further P&L damage. You can see this in the chart that from 2016 to 2020, insurers comfortably held a 4–5 year positive duration gap. But that edge eroded as Japan’s long-term yields rose and BOJ Yield Curve Control lost credibility. Now that the 30-year JGB yield has breached 2.75%, these insurers are facing mark-to-market losses and they’re being forced to sell into weakness. The second chart shows the result that net JGB flows from Japanese life insurers have plunged into deep negative territory through early 2025. This is not a tactical rotation it’s a systemic duration de-risking event, and it’s happening in the world’s most tightly held sovereign bond market. Why this matters globally: •Japanese lifers are major holders of U.S. Treasuries, European sovereigns, and global credit. If they’re de-risking at home, they may need to sell foreign assets too, creating ripple effects across global bond markets. •A withdrawal of Japanese capital means fewer buyers for long-duration debt at a time when the U.S. and Europe are issuing record amounts of it. •It signals the limits of central bank yield suppression. The BOJ may be forced to step back in with stealth QE or risk a bond market crisis. •It also injects volatility into FX markets particularly USD/JPY as capital flows repatriate or hedge mismatches widen. Bottom line: This isn’t just about Japan. It’s the leading edge of global duration stress. The BOJ’s failure to maintain policy control is forcing private capital to do what central banks fear most exit long duration at scale. The Japanese lifers are the canary. If this continues, other markets will follow. Watch the yield curve, watch FX hedging costs, and most of all watch what they sell next.

US inflation in July was broadly in line with expectation, with US headline CPI at below 3%, the first time since March 2021. July’s data is not perfect though, as housing inflation was up +0.4% MoM in July and still above +5.0% YoY. Sceptics will also point to the pickup in super-core (services ex-shelter) inflation in July, after two months of decline. But it’s worth noting that goods deflation deepened in July (driven by cars), which could be a symptom of weaker consumer demand. Overall, the continual slowdown in headline and core CPI on a yearly basis supports the notion that the worst of inflation worries are in the rear mirror, and that the focus for the Fed is shifting to employment. The mix of both slowing activity and inflation data suggests a rate cut starting in September is highly likely, and it is fully priced in. A 25-basis point cut seems more likely than a 50-basis point cut, as activity is not weak enough nor disinflation is entirely satisfactory enough. Though it’s worth pointing out there will be one more CPI report ahead of the September meeting. RBC Brewin Dolphin #USCPI #USinflation #FederalReserve #interestrates

The July CPI data imply that the Fed can no longer use inflation as a rationale to keep rates elevated. Today’s inflation data reflects yesterday’s monetary policy. That inflation has already been slowing implies the Fed has tolerated a dramatic increase in real interest rates. That policy rates are running well above most estimates of neutral lowers the threshold for larger moves, all else equal. Given the changing of the winds in the labor market, the trade-offs have now clearly shifted for the Fed. The risks between growth and inflation are moving away from balance. Growth is the main risk now. I think moving in 25bp increments is too slow given the evolution of the data. That said, what I have seen about the Fed’s first move implies the labor market data, not CPI, will determine whether the Fed moves 50bps at the September FOMC. Core CPI inflation rose just 0.165% over the month despite an unexpected increase in housing rents. Over the last three months, core CPI has climbed just 1.6%, the slowest pace since February 2021. Because CPI housing rents are based on leases signed a while ago and because new leases are rising at slower rates, there is good reason to assume that housing rental inflation slows in the months ahead, a temporary setback in July notwithstanding. 

CPI is down to 2.9% YoY per this morning's report, the lowest since March 2021. Core CPI is 3.2%, down from 3.3% last month, and the lowest since April 2021. All good news on the inflation front. Perfect setup for Fed rate cuts. The big driver in particular was Goods prices which are actually down -1.9% YoY which was driven by new and used car prices falling - as you can see on the attached chart. Shelter (the combination of home ownership cost and rental cost) is still up 5.05% YoY, but it's down from 5.19% last month. Again - that's still good news because prices are not rising as much. But housing prices are still stubbornly high. It will be really interesting to see what happens to long rates when the Fed lowers Fed Funds. What will be the resulting impact on mortgage rates? The affordability factor of mortgages has played a huge role in locking up both supply and demand in housing. Once those mortgage rates go 50-100 bps lower, it could be a real Wild West housing market. All the buyers and sellers on the sideline will stampede the market like the Oklahoma Sooners waiting for the land rush. ALM modelers beware! When that moment occurs, there could be a few quarters of massive bank balance sheet disruption. You may have a 3-6 month window to re-position your interest rate risk profile, and your balance sheet strength, for the next decade. All that pesky unrealized loss can be dealt with too. Prepare yourself accordingly to take advantage. Take a look at what Warren Buffett is doing. He is piling up a few hundred billion dollars in cash to take advantage. Piling up cash and pocketing Fed Funds 5.5% coupons to keep the money short is a decent idea to a) make risk free money, and b) be ready to seize the day when the stampede comes. Happy hunting! #fedpolicy #riskmanagement #interestrates

20 profit ratios that will transform how you analyze any business The numbers never lie, but you need to know how to read them 📊 Let me break down the most critical financial metrics you'll ever need 👇 ➡️ CORE PROFITABILITY RATIOS These ratios tell you exactly how well a business turns revenue into profit: 1️⃣ Gross Profit Margin The foundation of business profitability - what's left after direct costs. When this number drops, it's often the first sign of pricing pressure or rising material costs. 2️⃣ Operating Profit Margin This strips away the noise and shows pure operational performance. Want to know if a business is actually good at what it does? This ratio tells you. 3️⃣ Net Profit Margin The bottom line that matters. Shows exactly what you're left with after everything's paid. 4️⃣ EBITDA Margin Strips out accounting decisions to show true operational performance. Critical for comparing companies with different capital structures. ➡️ RETURN RATIOS - THE REAL PERFORMANCE INDICATORS 5️⃣ Return on Equity Your shareholders' report card. This number can make investors either jump for joy or run for the hills. 6️⃣ Return on Assets  Shows how well a company uses its assets to generate profits. This ratio becomes crucial when comparing asset-heavy industries. 7️⃣ Return on Capital Employed The heavyweight champion of performance metrics. It's like ROE and ROA had a super-smart baby. ➡️ EFFICIENCY RATIOS Now we're getting to the good stuff… 8️⃣ Asset Turnover Reveals how efficiently a company generates sales from its assets. Higher ratios usually mean better operational efficiency. Think of this as your business's speedometer. The faster it spins, the more efficient you are. 9️⃣ Inventory Turnover Critical for retail and manufacturing - shows how quickly inventory moves. Lower numbers might signal obsolete stock or poor purchasing decisions. 🔟 Accounts Receivable Turnover Measures how fast a company collects what it's owed. This ratio directly impacts cash flow - the lifeblood of any business. ➡️ MARKET PERSPECTIVE RATIOS 1️⃣1️⃣ P/E Ratio The market's expectation of growth packed into one number. But remember - high P/E isn't always better. It's about whether the company can meet those expectations. 1️⃣2️⃣ EPS Growth Shows the rate of earnings growth per share. This becomes powerful when tracked over multiple quarters. === Three principles I always follow when using these ratios: 1. Compare within industries - ratios mean different things in different sectors 2. Look for trends - a single number means nothing without context 3. Use multiple ratios - they work together to tell the complete story Which ratio do you find most valuable in your analysis? Share your thoughts in the comments below 👇

The Balance Sheet is the most valuable Financial Statement, yet most businesses ignore them. Here is what the Balance Sheet teaches you and how to analyze it: The Balance Sheet formula is: Assets = Liabilities + Equity Rework that formula and you get Assets - Liabilities = Equity What you own - what you owe = book value of the business. In this way, it’s answering the question, is this business healthy? A book value < 0 = Accounting Insolvency But Accounting Insolvency is just a book number; you might still be able to meet your obligations with cash flows. Good? No… but not cash flow insolvency, where you can’t meet your short or long-term obligations. The Balance Sheet is broken into 3 sections: • Assets: what you own • Liabilities: what you owe • Equity: the difference Both Assets & Liabilities are further broken down into short-term (less than year) or long-term (more than year hold or maturity). The Equity section is broken into these components: • Common stock (initial capital investment) • Owner’s contributions • Owner’s distributions • Retained earnings • Current Year Net Income Current Year Net Income from the Income Statement shows up in the equity section. Every year, that balance is zeroed out and rolled in Retained Earnings, which is a reflection of historical earnings of the business. To analyze this statement, you’re going to do two types of analysis: • Horizontal • Ratio Horizontal Analysis is looking at the change between a past period and the current period. That can be past month, quarter, or year. With Ratio Analysis, you’ll look for benchmarks as well as trends. Some common types of ratios are: • Liquidity Ratios These ratios measure your ability to turn assets into cash. Some favorites are: - Current Ratio or Quick Ratio - Cash Burn Rate / Cash Runway - Cash Conversion Cycle • Solvency Ratios These ratios show your ability to pay-off debts. Some common ones are: - Debt-to-equity Ratio - Interest Coverage Ratio - Debt Service Coverage Ratio • Return on Ratios These tell you what your return on investment is. Trying to use your assets efficiently? Use Return on Assets (ROA) Looking to measure financial efficiency compared to competitors? Return on Equity (ROE) Wonder how efficiently you’ve deployed investor capital? Return on Invested Capital (ROIC) Want to understand how well current capital is utilized (especially in capital-intensive industries)? Return on Capital Employed (ROCE) You should NEVER use all of these ratios. Choose the specific analysis tools that are best for your business and watch: • trends • thresholds When a trend turns bad or a threshold number is broken, dive deeper and determine why. Thanks for reading! If you’re a business owner and want to be able to use your financials as a decision-making tool, check out my cohort (it starts March 11th): https://lnkd.in/gXMntDyz