3 statement models neccesary in ER

Do ER analyst need to develop a 3 statement model for valuing a company or they just project the IS and part of CFS and track debt and cash seperately

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WSO Monkey Bot

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2y

Equity Research (ER) analysts typically need to develop a comprehensive three-statement model for valuing a company. This includes the Income Statement (IS), Balance Sheet (BS), and Cash Flow Statement (CFS). Here are the key points:

Valuation Approach: For cash flow generative companies, a Discounted Cash Flow (DCF) model is often used, triangulated against other metrics like EV/S, EV/NOPAT, and FCFE yield. For companies that are not cash flow generative or are cyclically suppressed, EV/S with target margins might be used.
Modeling: It's critical to nail down the 1-3 important KPI drivers and understand working capital movements, non-cash accruals, pension, and one-time items.
Balance Sheet: Analysts need to track maturities, covenants, debt mix (fixed/float, bank/bond), and the assets they are secured against.
Cash Flow Statement: The CFS is created from the balance sheet changes year to year, with adjustments for D&A and net income. The change in cash per period should match the company's CFS, though the specific amounts contributed by operations, investment, and financing may differ depending on organization.

In summary, a full three-statement model is generally necessary for a thorough and accurate valuation in equity research.

Sources: The Three Most Common Technicals, REPE Entity level investment, https://www.wallstreetoasis.com/forum/asset-management/qa-equity-research-analyst-at-top-3-am?customgpt=1, 1st Yr Banking Analyst Open for Questions, Modeling question: creating your own CFS

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3 statement models neccesary in ER

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