What exactly is an earnings model, specifically in reference to IM? I spoke to a PM yesterday and he recommended that I research some stocks I like and then build out an earnings model for each one. Is this just a discounted cash flow (DCF)? Is it basically just a pro forma income statement, where I predict future revenues, cash flows, and earnings? If it is the latter, would I need to build a pro forma balance sheet and SFC as well, or is the income statement enough?
Does anyone have an example of what an IM earnings model would look like? It seems like it would be easy if all I'm doing is making future growth assumptions, but I assume there's more to it than that.
Understanding Earnings Models
Modeling is an essential skill for any investment banker hopeful. Understanding how they work and being efficient at them is an absolute must.
User @Cornelius - Asset Manager - Executive Director
It’s usually a three statement DCF model. Depending on how in depth you want to get into it, you can bust out analyses related to the business. For example, Telco companies are valued on a subscriber basis. So in research reports/models, they build out valuations based on EV/subscriber which are built on projected subscriber growth which gets multiplied by some revenue per subscriber number and leads to total revenues.
I would suggest, building a 3-statement DCF model, breaking out segmented revenues/cogs/etc.Also calculate ratios for the companies - total debt/ebitda, acid test, etc.
You might also want to write something up on the company as well - not just about the business but what the numbers mean.
Wall Street Oasis offers a variety of templates to assist you with your models, including one specifically for DCF models.
User @bearing - Equity Research - Vice President
I also learned from my senior that when you model it is always good to build into checks to make sure your model is accurate. Some examples are to create some conditional probabilities to see if your A=L+E, Your NI = your dividends + RE, etc. Looking at some of our company models over the summer we had like 80+ accuracy checks built in.
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You're on the right track.
Its usually a three statement dcf model. Depending on how in depth u want to get into it, you can bust out analyses related to the business. For example, Telco companies are valued on a subscriber basis. So in research reports/models, they build out valuations based on EV/subscriber which are built on projected subscriber growth which gets multiplied by some revenue per subscriber number and leads to total revenues.
I would suggest, building a 3-statement dcf model, breaking out segmented revenues/cogs/etc.
Also calculate ratios for the companies - total debt/ebitda, acid test, etc.
you might also want to write something up on the company as well - not just about the business but what the numbers mean.
Bowser, you are def on the right track, 3 statement 5-year projected earnings model, with ratios and sensitized variables along with public comps. You should also come up with a 30 second investment thesis for each
PS My earnings models always include a base, downside and upside case but you should probably just run 1 conservative case if you dont feel like building in toggles and/or choose if functions
Good luck
I also learned from my senior that when you model it is always good to build into checks to make sure your model is accurate. Some examples is to create some conditional probabilities to see if your A=L+E, Your NI = your dividends + RE, etc. Looking at some of our company models over the summer we had like 80+ accuracy checks built in.
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