This article will look at how Microsoft Excel can be used to perform various financial analysis calculations and tasks.
Using Excel for Financial Analysis
It’s vital for those who work in the financial sector to have a solid understanding of core Microsoft Excel functions and tools. Because all quantifiable data can be imputed and manipulated, the more you know about Excel, the greater the insights you can extract from the data it is asked to handle. Although it would be a daunting task to attempt to master each of Excel’s many features, Financial Analysts must know how to perform those specific to finance.
For example, Investors rely on Excel to find accounting ratios or perform technical calculations. Corporations often use this spreadsheet application to execute risk analysis or capital budgeting analysis. In addition, Option Traders work with Excel for Black-Scholes pricing, which is one of the most-used ways to price an options contract. In fact, Excel can perform hundreds of financial analysis models.
Excel Functions for Financial Analysis
The following are some of the most useful Excel formulas and functions for Financial Analysts:
- XNPV is the most-used Excel formula for those who work in the finance sector. Analysis performed to determine a company’s worth must first establish the Net Present Value (NPV) of cash flows. The XNPV function does more than this; it also considers dates for cash flows, which makes it precise.
- MIRR is essentially a variation of the internal rate of return. Those working in finance use this function in situations in which cash from an investment is then invested in another investment. One example where a modified rate of return would be useful is if a private business invests its cash flow into government bonds.
- PMT is a type of mortgage payment calculator. It’s often used by those whose work involves real estate financial modeling. When you know the interest rate, a number of time periods such as months or years, and the total of the mortgage, PMT provides a way to calculate how much payments will cost. Total payment is provided by this function, which includes interest as well as principal.
- IPMT differs slightly from PMT. It has applications for calculating interest on a debt payment. Oftentimes, Analysts use IMPT alongside PMT to create a comprehensive report on various investments and their anticipated interest. Once the interest amount is calculated, the principal can then be separated, which companies can use for subsequent investments.
- FV has applications in situations in which the Excel user needs to figure out how much money they’ll eventually have based on an initial balance, recurring payments, and compounding interest.
- XIRR is used to calculate the internal return rate for cash flows that may not occur periodically.
- DB is a popular function in accounting. For those who wish to avoid creating a significant declining balance depreciation schedule use DB to calculate each period’s depreciation expense.
- EFFECT is an important Excel function for anyone working in finance, especially those who work primarily with borrowing or lending schemes. EFFECT calculates the annual interest rate of non-annual compounding.
- LEN is not as commonly known as the other Excel functions on this list. However, it’s helpful for Financial Analysts who must organize and work with large datasets. Because the data with which they work isn’t always clean or organized, LEN can help with this. This formula returns a text string as a number of characters, which provides a way to count the characters in some text.
- PV helps Financial Analysts calculate an investment’s current value based on future payments, income, and interest rate.
- NPV is used to calculate an investment’s current net value based on income, future payments, and discount rate.
- CHOOSE is a helpful function for performing scenario analysis in financial modeling. With it, Financial Analysts can select from a specific number of options and return the selected choice. If, for example, you have three revenue growth assumptions for the following year, 10%, 15%, and 20%, the CHOOSE formula will return 15% if you specify that you’d like the second choice.
While each of the above-mentioned formulas and functions can be used independently for financial analysis, they can also be combined in various forms for additional analysis power.
Excel Features Commonly Used by Financial Analysts
In addition to functions, Excel also provides Financial Analysts with other features and tools that help them display data in a clean and organized fashion. When creating presentations or reports based on data findings, Financial Analysts must ensure that their spreadsheets are formatted properly. A few formatting tricks can distinguish a spreadsheet and ensure that it’s easily accessible to audience members:
- Text colors can be formatted to help distinguish certain values, as well as to guide the eye to important findings on a worksheet. For example, you could use black for any formulas that are linked to other cells in the same worksheet, blue for hard-coded numbers and constants, green to signify formulas that contain links to another worksheet, and red to show formulas containing external links.
- Formatting numbers is another way to create a professional-grade spreadsheet. Currency symbols have applications for monetary values found in financial reports and models. Negative numbers can be displayed inside brackets to distinguish them from other values in a worksheet. Percentages are typically displayed with the % sign and one decimal place. They can also be italicized to set them apart from regular numbers (except when they are used in assumptions.)
Get Started Learning Excel with Hands-On Classes
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