There are a lot of different financial models used to understand the past financial performance of a company better, comparing it to its competitors and making an estimate on where the company could be in the future. While there are plenty models used, we’ve decided to focus on the top five financial models.
In this article you will learn more about these financial models, how they work and whether or not it’s a good fit for you. Let’s get started.
1. Credit Rating Model
A Credit Rating Model is typically used when a business wants to apply for a new loan. It is based on the Three Statement Model, but includes projections of 3-5 years and takes other factors into account too. A final credit risk score is calculated and based on industry risk score, financial risk score, management risk score and business risk score.
2. Discounted Cashflow Model
This model is used by investors to calculate the value of a business they wish to invest in. It is based on projected future cash flow and aims to evaluate a company’s monetary value. In this model future cashflows are discounted depending on the company’s cost of capital and capital structure and then summarized to calculate the estimate.
3. Three Statement Model
This model is traditionally used by financial service providers to assess a company’s historical financial performance. Three statements are used for the evaluation including a balance sheet, income statement and cashflow statement.
4. Comparable Company Analysis
This model is specifically used to see how a company measures up to its competition. In this model the company’s business and financial profiles are evaluated to establish who the competitors are by way of several different types of financial ratios.
5. Merger and Acquisition Model
This financial model is used when two companies decide to merge for whatever reason or when a company is bought or acquired by another. It mainly entails the consideration of financing options once the merger or acquisition is complete.
Whatever financial model is used will depend on the company itself, the purpose of the financial model as well as why the company needs a financial model. Some of these can be used simultaneously, and each case will require a fresh approach.