gabrielmoreira Financial Analysis Skill
Financial modeling, analysis frameworks, and regulatory awareness for business-minded professionals.
Core Principle
Financial analysis transforms raw numbers into decisions. Every model, ratio, and forecast exists to answer one question: Should we do this?
Financial Statement Analysis
The Three Statements
| Statement | Measures | Key Question |
|---|---|---|
| Income Statement | Profitability over a period | Is the business making money? |
| Balance Sheet | Assets, liabilities, equity at a point in time | What does the business own and owe? |
| Cash Flow Statement | Cash movement over a period | Where is the cash going? |
Key Ratios
Profitability
| Ratio | Formula | Meaning |
|---|---|---|
| Gross Margin | (Revenue − COGS) / Revenue | Pricing power and production efficiency |
| Operating Margin | Operating Income / Revenue | Core business profitability |
| Net Margin | Net Income / Revenue | Bottom-line profitability |
| ROE | Net Income / Shareholders' Equity | Return to equity holders |
| ROA | Net Income / Total Assets | Asset efficiency |
Liquidity
| Ratio | Formula | Healthy Range |
|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | 1.5–3.0 |
| Quick Ratio | (Current Assets − Inventory) / Current Liabilities | 1.0–2.0 |
| Cash Ratio | Cash / Current Liabilities | 0.5–1.0 |
Leverage
| Ratio | Formula | Watch For |
|---|---|---|
| Debt-to-Equity | Total Debt / Total Equity | >2.0 signals high leverage |
| Interest Coverage | EBIT / Interest Expense | <1.5 signals debt stress |
| Debt-to-EBITDA | Total Debt / EBITDA | >4.0 may limit borrowing capacity |
Financial Modeling
DCF (Discounted Cash Flow)
When to use: Valuing a business, project, or investment based on future cash flows.
Steps:
- Project free cash flows (FCF) for 5–10 years
- Calculate terminal value (perpetuity growth or exit multiple)
- Discount all cash flows to present value using WACC
- Sum = enterprise value
- Subtract net debt → equity value
Key assumptions to document:
- Revenue growth rate and drivers
- Margin trajectory
- Capital expenditure requirements
- Working capital changes
- Discount rate (WACC) and terminal growth rate
Comparable Company Analysis (Comps)
| Step | Action |
|---|---|
| 1 | Select peer group (industry, size, geography) |
| 2 | Gather trading multiples (EV/EBITDA, P/E, EV/Revenue) |
| 3 | Calculate median and mean multiples |
| 4 | Apply multiples to target company metrics |
| 5 | Derive implied valuation range |
Scenario Analysis
Always model three cases:
| Scenario | Purpose | Probability Weight |
|---|---|---|
| Base | Most likely outcome | 50–60% |
| Upside | Favorable conditions | 20–25% |
| Downside | Adverse conditions | 20–25% |
Budgeting & Forecasting
Budget Types
| Type | Method | Best For |
|---|---|---|
| Zero-based | Justify every line from zero | Cost control, new initiatives |
| Incremental | Adjust prior year ±% | Stable operations |
| Activity-based | Cost per activity/output | Service organizations |
| Rolling | Continuously extend 12-month window | Dynamic environments |
Variance Analysis
| Variance | Formula | Interpretation |
|---|---|---|
| Favorable | Actual better than budget | Outperformance or conservative budget |
| Unfavorable | Actual worse than budget | Underperformance or aggressive budget |
| Volume variance | (Actual units − Budget units) × Budget price | Demand-driven |
| Price variance | (Actual price − Budget price) × Actual units | Pricing/cost-driven |
Real Estate Financial Analysis
Property Valuation Methods
| Method | Approach | Best For |
|---|---|---|
| Cap Rate | NOI / Property Value | Income-producing properties |
| Comparable Sales | Recent sale prices of similar properties | Residential, land |
| Cost Approach | Land value + replacement cost − depreciation | Unique properties |
Key Metrics
| Metric | Formula | Target |
|---|---|---|
| Cap Rate | NOI / Purchase Price | 4–10% depending on market |
| Cash-on-Cash Return | Annual Cash Flow / Total Cash Invested | 8–12% |
| DSCR (Debt Service Coverage) | NOI / Annual Debt Service | >1.25 |
| GRM (Gross Rent Multiplier) | Price / Annual Gross Rent | Lower = better value |
Regulatory Awareness
Key Frameworks (Not Legal Advice)
| Framework | Scope | Applies To |
|---|---|---|
| SOX (Sarbanes-Oxley) | Financial reporting controls, audit requirements | US public companies |
| PCI-DSS | Payment card data security | Any business processing card payments |
| Basel III/IV | Capital adequacy, liquidity requirements | Banks and financial institutions |
| Dodd-Frank | Financial stability, consumer protection | US financial institutions |
| IFRS vs GAAP | Accounting standards | International vs US reporting |
| MiFID II | Financial instrument markets | EU investment firms |
Financial Compliance Patterns
- Segregation of duties: No single person controls an entire financial process
- Audit trails: Every financial transaction traceable to source documentation
- Materiality thresholds: Define what magnitude of error requires disclosure
- Internal controls: Preventive (approvals) and detective (reconciliations)
Anti-Patterns
- Building models without documenting assumptions
- Using a single-point forecast instead of scenarios
- Confusing revenue with cash flow
- Ignoring working capital in projections
- Treating all debt as equivalent (ignoring covenants, maturity, rates)
- Circular references in spreadsheet models without iteration controls