If you’ve already tried applying for an Investment Banking job, then you will know first hand that breaking in is a battle. Investment Banking Analysts earn substantially more than other professionals except sportsman, rock stars and celebrities.
Presumably if you’re reading this blog, then you’re among the many bright young candidates looking to get your foot in the door. If you aspire to make a career in Investment Banking, you’ve come to the right place. Before moving ahead, let’s fill you in on who we are.
Part of School of Jobs, SIB – School of Investment Banking is a pioneer in the provision of practical and career oriented training in the fields of Investment Banking, Private Equity & Equity Research. What sets us apart is the fact that in addition to providing cutting edge training, we leverage our contacts with recruiters to secure world class placement opportunities for candidates who invest in our full time immersive programs.
Due to our placement efforts, SIB alumni are today pursuing their career ambitions with the likes of JP Morgan, Goldman Sachs, Citi, Deutsche Bank, Bank of America, HSBC, Nomura, PJT Partners, Canaccord Genuity, PwC, Ernst & Young and many more across New York, London, Johannesburg, Dubai, Mumbai, Delhi, Singapore, Hong Kong & Sydney.
We have a ring side view into what recruiters are looking for and what it takes to break in. Our goal in this blog is to make you aware of the key skills needed to break in. To be more specific, there are different types of skills needed and our goal here is to capture the main technical skills needed.
Accounting & Financial Statement Analysis
You should be comfortable with how to navigate through and understand financial statements and annual reports. You don’t need to be an expert on either US GAAP or IFRS, but you should be familiar with concepts and skills that can be applied to financial statement analysis in general. You must be familiar with:
- Various items that make up the financial statements
- Depreciation and commonly used approaches
- Income statement, balance sheet and cash flow statement
- How the double entry system works
- Ratio analysis and how to apply the same to compare & analyze financial statements
- Understand leases and related accounting
- Retirement plans
- GAAP to Non GAAP adjustments
- Consolidation Accounting
As an Analyst or Associate working in Investment Banking, Private Equity or Equity Research, a major part of your work will revolve around valuation using various techniques. Across the buy side and sell side, valuation tools are widely used to value target companies for M&A, to evaluate entry and exit multiples and IRR returns for private equity investors and to give stock recommendations of buy, sell and hold. Therefore, mastering valuation is a bread and butter skill set for all aspiring Analysts and Associates.
Valuation – Trading Comparables
Trading comparables, or comps as per popular industry jargon, are a multiples based valuation methodology. First we calculate trading multiples for a particular company, and then these multiples are compared with industry peers to determine whether a stock is over or under valued. Therefore, this is a relative valuation methodology.
The most common way to buy an asset is to find the price of similar assets. As an analogy, if you are looking to buy a flat, first you try to find the price of comparable flats before agreeing on a final price for the flat that you want to buy. Trading comps work along similar lines. Master valuation of Facebook, Alphabet (Google) and Vodafone right here.
You must be familiar with:
- How to identify peers
- Calculating equity value and enterprise value (EV)
- Equity value and EV multiples
- Sector specific multiples
- How to calendarize & normalize financials
- Computing trailing multiples using last twelve months or LTM
- Fully diluted shares outstanding
- Rationale and how to make adjustments for Non Controlling Interests, Associates and Affiliates
- How leases and pensions impact valuations
- Convertible securities
- Interpreting results and sanity checks
Valuation – Transaction Comparables
Like trading comps, transaction comps (or precedent transactions) are a relative valuation methodology and determine how much an acquiror has paid for a target company. The price paid is measured and represented by a multiple.
For example, if you were told that Tata acquired Corus at a price of GBP 6.08 per share or an Enterprise value of GBP 6.6 billion, this information in itself provides little information about Tata’s acquisition of Corus.
If on the other hand, you were told that Corus was acquired at a multiple of 9.0x LTM EBITDA, isn’t this information more useful and actionable? The idea being that, in the future when an acquiror is looking to acquire a steel company in Europe or another developed economy, they are likely to keep in mind the multiple that Tata paid for Corus as a reference point. If an acquiror is making a bid that values the target at 8.5x LTM EBITDA, they can convince shareholders that they are getting a good deal compared to what Tata paid for Corus at 9x LTM EBITDA. Transaction or deal multiples in a particular sector or economy become a benchmark for future transactions.
To learn about Telefonica’s acquisition of O2, Krafts’ hostile bid for Cadbury and Microsoft’s acquisition of LinkedIn, click right here.
Valuation – Discounted Cash Flow (DCF)
Discounted Cash Flow or DCF is a useful valuation tool that enables investors and Analysts to determine the intrinsic value of a company. It is considered to be more robust compared to other valuation methodologies.
A business is expected to generate cash flows over a period of time. But as an investor, it is important to determine the intrinsic value or the underlying worth of the business today, before making an investment decision. Discounted Cash flow or DCF valuation involves estimating future cash flows a business will generate and then discounting these to present value terms, at a cost of capital that represents the riskiness of underlying cash flows.
Cash flows are forecast until a business reaches a steady state. In such cases, it is common practice to use a 2 stage DCF, where stage 1 involves projecting cash flows over the forecast period and stage 2 involves estimating terminal value at the end of the forecast period. To upskill and prepare a comprehensive DCF for Heineken, the beverages major, click right here.
The main steps involved in preparing a DCF are as follows:
- Estimating and forecasting free cash flows
- Calculating cost of capital (weighted average cost of capital or WACC; cost of equity)
- Estimating terminal value
- Determining value and interpreting results
Keep in mind, that it is financial modelling skills that separate a star analyst from the rest of the pack. As a result, mastering financial modelling is a crucial skill for all aspiring professionals. Financial modelling needs a lot of drive and initiative. It’s going to test your skills and you will be on a steep learning curve.
First and foremost, even before you begin to put pen to paper, it is crucial that you educate yourself about the company and industry. This can be done by going through equity research reports. Corporate documents like annual and quarterly reports contain a wealth of valuable information and insights. So, the process of building a financial model starts with education and getting smart about a company and industry.
Before building a model, it is very important that you understand what the drivers of business are. You will need to use these drivers to forecast financials. Here are two cost effective and high impact self study courses to help you get up to speed with Financial Modelling: Jet Blue, American Airline; Infosys, Indian IT major.
If you are looking for a one stop shop, our Mid Cap Bundle covers seven carefully crafted courses that form a key part of an Analyst’s knowledge base.