Welcome to FinNugget

Why is financial analysis important?

Because by analyzing the proper indicators a Company or an individual can make informed decisions. What are those indicators?

To a company, the most important piece of financial information is its net gain, and in order to make decisions, it must often project net gains into the future. But, those forecasts are difficult to interpret. A company's net gains over time become more meaningful when they are collapsed into a single measure: today's equivalent of those future net gains.

Today's equivalent of future financial net gains depends on what we term the three value generation engines:

1. Revenue generation,
2. Management efficiency, and
3. Credit rating.

The first engine looks at a company's capacity to transform what it is offering into money. The second engine analyzes how much money it keeps, per period, once all payments have been made. The third engine looks at how much does the company have to pay in order to obtain money on loan with various progressive maturities, and that cost of money is what enables finding today's equivalent of future net gains.

You may analyze those engines in the company value submenu within the Sand Box menu item. The result of the interaction of the three engines is what is termed the net present value, and it is inherently uncertain.

Once you have that net present value, you may transform it into equally valuable alternative projects or financial instruments. A few examples would be a bond with a certain maturity and a given yearly coupon payment, or a set of annuities. You may carry out such transformations using the Equivalent Cash Flows menu item.

Companies and individuals often have disposable income and are looking for investment opportunities. The analysis of investment opportunities constitutes another important aspect of financial analysis. Marketable financial assets have price variations, and by analyzing those price changes over a large enough number of periods you may find it advantageous to identify the composition of a portfolio of those assets yielding minimum variance for a given level of expected return. You may carry out such analysis in our Investment models menu item.

When the price of a financial asset or instrument, moves in the opposite direction to your interests, then you may consider that possibility a risk. It might be beneficial for you to reduce or eliminate that risk by buying financial options. The Options menu item enables you to find the required option's arbitrage free price. You may also explore the Payoff function for a set of Options in the Payoff submenu item.

When a company will be paid in a different currency for services rendered, the exchange rate may fluctuate and may result in adverse movements. You may eliminate such risks by entering into a forward contract. The arbitrage free price may be found in the Forwards & Swaps menu item.

Similarly, if a company has to enter into a debt contract and the payments will depend on a floating interest rate, but conditions change and the company would then like to switch to a fixed rate, what would be the equivalent fixed rate? You may find the answer to this and to similar questions in the Swaps alternative of the Forwards & Swaps menu item.

All future financial interactions depend on the interest rates. It is important for you to understand what are nominal, effective and real interest rates. How they are inter-related, and how inflation rates play a role in those inter-relationships. Furthermore, it is important for you to learn how to use the set of interest rates that are needed to analyze a set of future cash flows over a multi-year period setting. You will be able to look into these relationships in the Interest rates menu item.