Student in over my head building model
Hey guys. I'm a student & intern at a small PE shop where I've built some basic models, contributed to LBOs, etc. On the side, I've started working on building DCFs for some public companies that interest me as a way to practice. I also want to be able to build pitches to enter into stock pitch comps.
However, the complexity of the financial statements of these large public companies is way different than what I've looked at in my PE internship. I feel like I don't have the mental framework yet to understand how to understand or project line items I haven't seen before. How do I train this? I'm not used to trying to project balance sheets that have 40 line items. How do I learn what I'm allowed to consolidate, what I have to project individually, and what to project the unique line items as a % of?
Apologies if this is dumb, not usually the type of post I'd make on here but feeling very frustrated by my inability to wrap my head around some of it.
To tackle the challenges you're facing, here's a structured approach based on the most helpful WSO content:
Master the Basics of Financial Statements: Start by ensuring you have a solid understanding of how the three financial statements (Income Statement, Balance Sheet, and Cash Flow Statement) connect. The "3 Statement Model" resources on WSO are a great starting point. This will help you understand the flow of line items and their interdependencies.
Simplify and Consolidate: For large public companies with complex financials, focus on consolidating similar line items where possible. For example:
Focus on Key Drivers: Identify the most critical line items that drive the company's performance. For instance:
Leverage Industry-Specific Insights: If you're working with companies in specific industries, tailor your approach. For example:
Use Templates and Guides: WSO offers financial modeling templates and a DCF Modeling Training Guide. These resources can provide a framework for structuring your models and understanding how to project line items.
Practice with Simpler Models: Before diving into complex public company models, practice with smaller, simpler companies. This will help you build confidence and refine your approach to projections.
Seek Feedback: Share your models with mentors, peers, or forums like WSO to get constructive feedback. This can help you identify areas for improvement and learn from others' experiences.
Iterate and Learn: Building models is a skill that improves with practice. Don't be discouraged by initial challenges—each model you build will enhance your understanding and efficiency.
For additional guidance, consider exploring WSO's DCF Modeling Course, which covers topics like projecting free cash flow, understanding unlevered vs. levered cash flow, and more.
Sources: Associate guide on analyzing an income statement, how comfortable should I be with accounting/valuation concepts?, Associate guide on analyzing an income statement, Feedback on Stock-Pitch., 1st Yr Banking Analyst Open for Questions
These are actually are all great questions for ChatGPT. Take a line item you don’t recognize your choice and ask it what does it mean, then ask it to which of the major line items is it most similar too that you want to consolidate.
It takes reps but you’ll find companies of a similar industry will typically break out the same things
Really appreciate this! I actually realized this some hours after I posted and used Claude to clarify for me.
If you're curious what the exact issue was, I was building out a $SQ DCF for my pitch. Didn't know how to project out consumer receivables/account receivables because they are much different (in this context specifically) and tied to much different parts of revenue generation, so I didn't want to project out as a % of revenue. Ended up building out a much more comprehensive revenue model as a supporting schedule and tied consumer receivables to GPV, which is their main KPI. Really, all I had to do was dig into the 10k a little bit more... was just frustrated in the moment of this post I suppose. But now I know! and now I know how to find what these line items are tied to in the company's reports.
There were some other annoying line items too that Claude helped clarify, but building out that revenue projection model got me 95% of the way there
It sounds like you should start simpler to get the hang of it. Maybe start with a small cap company that manufactures something simple or a software company with only a few products. This will give you experience with the mechanics and then you will be able to understand the bigger and more complicated companies.
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