1. Data Collection
- Gather key documents:
- Balance Sheet: Provides a snapshot of assets, liabilities, and equity.
- Income Statement: Tracks revenue, expenses, and profit over a period.
- Cash Flow Statement: Shows inflows and outflows of cash.
- Verify the accuracy of historical financial data.
- Create a list of company-specific KPIs.
2. Key Ratios to Calculate
- Liquidity Ratios (Assess short-term financial health):
- Current Ratio = Current Assets ÷ Current Liabilities.
- Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities.
- Profitability Ratios (Measure profit generation):
- Net Profit Margin = Net Income ÷ Revenue.
- ROE (Return on Equity) = Net Income ÷ Shareholder’s Equity.
- Efficiency Ratios (Evaluate resource usage):
- Inventory Turnover = Cost of Goods Sold ÷ Average Inventory.
- Solvency Ratios (Assess long-term stability):
- Debt-to-Equity Ratio = Total Debt ÷ Total Equity.
3. Trend and Comparative Analysis
- Compare financial performance over 3–5 years.
- Perform industry benchmarking (use public competitors’ data).
4. Interpretation and Insights
- Identify growth patterns (e.g., CAGR for revenue).
- Highlight any red flags (e.g., declining net profit margins).
- Suggest actionable recommendations.
Template Outline:
1. Profit & Loss Overview
- Revenue Analysis:
- Break revenue down by product, region, or customer segment.
- Expenses:
- Separate fixed vs. variable expenses.
- Profitability:
- Calculate gross profit, operating profit, and net income.
2. Break-even Analysis
- Identify fixed costs (e.g., rent, salaries).
- Calculate the contribution margin (Revenue - Variable Costs per Unit).
- Formula: Break-even Sales = Fixed Costs ÷ Contribution Margin.
3. Cash Flow Projection
- Create a monthly cash flow forecast:
- Operating cash flow (e.g., net income + non-cash expenses).
- Investing cash flow (e.g., asset purchases).
- Financing cash flow (e.g., loans, dividends).
4. Financial Ratios (For Investors or Management)
- EBITDA Margin = EBITDA ÷ Revenue.
- Return on Assets (ROA) = Net Income ÷ Total Assets.
- Customer Acquisition Cost (CAC) = Marketing Expenses ÷ New Customers.
- Lifetime Value (LTV) = (Customer Revenue × Retention Period) - CAC.
5. Visualization Tools
- Use charts and dashboards to display KPIs (Excel, Tableau, or Google Sheets).
1. Pre-Investment Research
- Stock Analysis:
- Check valuation ratios: P/E Ratio, PEG Ratio.
- Analyze dividends: Yield, payout ratio, and sustainability.
- Bonds:
- Check yield to maturity (YTM) and credit ratings.
- Real Estate:
- Calculate cap rate = Net Operating Income ÷ Property Value.
2. Risk and Return Metrics
- Calculate expected return:
- Portfolio Weight × Individual Asset Return.
- Use tools like Sharpe Ratio (Return – Risk-Free Rate ÷ Standard Deviation).
3. Discounted Cash Flow (DCF) Analysis
- Project future cash flows (3–5 years).
- Use a discount rate (e.g., Weighted Average Cost of Capital).
- Formula: NPV = (Cash Flow ÷ (1 + Discount Rate)?).
4. Scenario Testing
- Create best-case, worst-case, and baseline scenarios.
- Stress test for market volatility.
1. Budget Template
- Categorize monthly expenses:
- Fixed (e.g., rent, insurance).
- Variable (e.g., dining out, shopping).
- Include income streams: Salary, side hustles, passive income.
- Example Tools:
- Google Sheets (free budget tracker).
- Apps: YNAB, Mint, or EveryDollar.
2. Net Worth Tracker
- Assets: List savings, investments, property, vehicles, etc.
- Liabilities: Include credit card debt, student loans, and mortgages.
- Formula: Net Worth = Assets - Liabilities.
3. Debt Repayment Plan
- Use the Avalanche Method: Pay off high-interest debts first.
- Or the Snowball Method: Pay smallest debts first for motivation.
4. Retirement & Investment Planning
- Set retirement goals (e.g., target amount at 65).
- Use a compound interest formula for projections:
- Future Value = Principal × (1 + Rate)?.
- Track progress in a retirement savings calculator.