7 Financial Models Used by Investment Bankers

Financial modeling is a crucial aspect of investment banking and it is the process of creating a projection of a company’s financial performance based on historical data, current trends, and future assumptions. Financial models are used by investment bankers to value companies, perform due diligence, evaluate potential acquisitions, and support fundraising activities, among others.

In this article, we will discuss the different financial models used by investment bankers, ranked from simplest to most complex.

Table of Contents

1. Trading Comps Template

A trading comps template is used to value a company based on financial metrics. It is one of the simplest financial models used in investment banking and is typically used as a starting point for more detailed valuation analysis. The template is created by finding comparable companies, pulling financial data from resources like FactSet or Capital IQ, and then fact-checking the numbers with the company’s 10-K or 10-Q.

2. Sum of the Parts Analysis

A sum of the parts analysis is used to value a company with multiple divisions that have distinct operations and financial characteristics. In this model, each division of the company is valued separately, using comparable company analysis or other valuation methods, and the values are then summed up to get an overall enterprise value. This model requires some basic accounting knowledge but is relatively easy to put together.

3. Simple Operating Model

A simple operating model consists of the three financial statements: income statement, balance sheet, and cash flow statement. It requires a basic understanding of accounting and how these statements are linked together in excel. There are many resources available to help put together a simple operating model, making it a relatively straightforward task.

4. Discounted Cash Flow (DCF) Model

A discounted cash flow model is used to estimate the present value of future cash flows generated by a company. This model is based on the premise that a company’s value is the present value of its expected future cash flows. A DCF model is relatively simple to put together, requiring only a basic understanding of excel and accounting, and can typically fit on one tab.

5. Back of the Envelope Accretion/Dilution Analysis

An accretion/dilution analysis is used to evaluate the impact of an acquisition on the earnings per share of the acquiring company. A back of the envelope accretion/dilution analysis is a quick and dirty test to determine if an acquisition is accretive (earnings per share increase) or dilutive (earnings per share decrease). This model is not meant to be highly accurate, but rather to give a rough estimate of the impact of an acquisition.

6. Quick and Dirty Leveraged Buyout (LBO) Model

An LBO model is used to evaluate the feasibility of acquiring a company using debt financing. A quick and dirty LBO model uses basic assumptions and is intended to provide a rough estimate of the financial viability of an acquisition in a short amount of time. This model can even be performed on paper using simple calculations.

7. Initial Public Offering (IPO) Model

An IPO model is used to evaluate the financial viability of a company going public. This model typically includes a detailed revenue and expense forecast, balance sheet projections, and cash flow projections. An IPO model requires a high level of detail and a deep understanding of financial modeling, accounting, and excel.

Conclusion

In conclusion, financial modeling is an important tool in investment banking and there are various financial models used to evaluate different aspects of a company’s financial performance. Each model has its own complexities and requirements, but with the right resources and training, they can be mastered by investment bankers.