Modelling question for incoming analyst at HF
I'm ashamed to ask the question but this is now or never.
When people say "you have to link the 3-statement in your model", are we also talking about the historical numbers? I thought we just needed to input the published figures in the model and link our 3-statement only to project the forward period.
Thank you for clarifying
The “right” way to do it is link the statements for the historicals, I.e. derive the CFS from the IS and BS, and then have a “check” somewhere in your model which makes sure that the historical cash flows presented in the 10K/10Q are the same as what your own model CFS presents. In fact ideally you should have the checks for all statements just to make sure you didn’t err
Add the check lines for all the historical periods.
Check lines I use (beyond the ones in I/S) are one for the balance sheet (and a reconciliation line labeled cash) and then in the C/F statement one for every of the 3 parts of it.
Don't waste time with this unless (a) you're at a forensic accounting shorting fund or (b) your PM is psychotic and explicitly asks you to
this.
I'm at an MM and we frequently:
Don't balance balance sheets (as long as its not entirely disruptive, its fine lol)
Don't make balance sheets (sometimes revenue builds with barrel trackers and incrementals/drop-throughs is all you need for that sweet EPS/EBIT(DA) number)
What the hell is a roic lol
Hey I am talking to a PM that was formerly at an MM, and he doesn't model past the IS...wtf? Is that normal? Haven't had the chance to ask him about it yet.
Bump
I put all the detail, all of it, from historicals into my hardcode sheet and tie and balance and include pre/post restatement
the actual model tho - I’ll just take from that page whatever is needed to model/project ‘what matters’ often times that’s a deep revenue / cost build, and then capture the big variance items in BS and ‘other’ the rest
Be aware when the cycle turns you may suddenly need to know what maturities are when and how much of the cash rent is on capitalized leases for example. Or if mgmt is screwing around with accruals and reserves to hit headline KPIs you want to know where it comes from
Do you guys know if people use to model quarters in the LO community? Or only model yearly?
Most analysts model yearly.
Interesting, would you advice a candidate to model yearly for a case study at a LO?
Also, how far in the future do you guys tend to model? In HF, it's 2/3 years forward I would say.
Even a quant with limited excel experience like me know that you just simply build a time-series row which indicates whether current column historical or forecasted.
If historical then grab the data from historical financial statements from another tab (which you imported hardcoded).
If forecasted then grab from your calculations.
The smart quant actually needs to be told by a row when a period is located in the past or the future relative to today?
quants don't touch excel, just me back in the day (in college) that's how i modelled stuff.
Do you guys link the net change in cash in your CFS and the cash&equivalent figures in your BS?
I saw models from senior guys and the cash of year 2 is not equal to change in cash from year 1 to year 2.
Would be interest as well, I am on the sell-side it almost never matches lol. I assume if it was an LO it would matter...but maybe CF doesn't matter as much for L/S trading
I mean it can matter. If you're having large discrepancies and plan on covering the name long enough then eventually it'll start impacting your capex assumptions at best and mess up your entire model at worst if it strays too far from reality, (i.e no longer able to be cognisant of expense/revenue items in B/S which start to leak into the income statement/ebit bridge eventually). Might not be an issue at first, but it *could* accumulate.
You just need to ask the right questions. Look at how the stock is going to go to work for you and make money; where should you spend your time?
People need to be more pragmatic imo. What makes money makes money.
This thread is sort of hilarious to me - I've never done a 3-statement model other than in a model test. Did 2yrs IB, 1 yr MF PE, 2 yrs at a large fund. I build out debt / working capital schedules and calc change in cash, but definitely don't explicitly model the entire B/S or CFS.
I mean its eye opening for those of us wondering what the real world day to day is like at pod shops and elsewhere. Are you at a pod now?
Especially w/regards to modeling tests, always felt like I would struggle to finish integrating everything in time. Good to know income statement light (with strong insights) is the best way forward.
The real answer is that its varied lol. Some teams do simple CFS/B/S', some don't do a B/S, some will do an entire 3FS w reconciliation matrix to back out adjusted numbers (thank god for acuity)
I am at a well-known multi-strat / special sits fund.
I don't see the point of modeling every single line of the B/S and CFS anyways outside of core line items. In many cases you're just plugging or zeroing out (is it really value add to plug FX fluctuations?). Especially in my coverage, companies trade on 3-4 line items and they're all income statement / operating model based.
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