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| A clearinghouse of financial models |
Analysis involves financial statements, financial ratios, projections of income statements, cash flows and balance sheets, and a presentation of various business scenarios. It also involves an assessment of the financial condition of the company and often a careful determination of its value. Decades ago analysts and bankers used pencil, erasers and paper spreadsheets to do these exercises, aided by slow calculators and rock-hard patience to complete these tasks over 1-2 days.
Today, analysts, whether they know it or now, are gifted with technology tools to perform the same tasks in just a few hours. In days of yore, financial analysts endured tedium to ensure that numbers were transferred from detailed financial reports to paper spreadsheets accurately. Balancing balance sheets was a monumental task. Because these tasks were physical and time-consuming, there were limits in what analysis could do--limits in the way company performance could be projected, limits in how many scenarios could be presented and evaluated, or limits in what growth rates or interest rates to use in assessing a company's value or creditworthiness.
Today, these exercises are conducted using elaborate, precise, sometimes complex financial models, all performed swiftly with computing assistance. Researchers and analysts no longer "do spreadsheets," as much as they tweak them, adjust them, or churn them through countless scenarios. What an irony. With vast amounts of computer power and with innumerable financial models available to perform almost any kind of financial evaluation of a company, financial analysts and associates at banks, hedge funds and private-equity firms continue to labor inhumane hours each week (and weekend) doing the work that those in a long-ago generation performed via labor and hand muscle.
Many will say in current times, the stakes are higher; banking deals are done at much larger amounts (some in the billions). Competition is fiercer, tougher. And business demands to get the deal done right, with precision and no tolerance for failure, become primary factors that keep junior associates toiling in bank cubicles until the wee hours. Clients want answers and updates right now. Trading and investment decisions must be made on the spot.
Yet with all the computing power and available financial models, today's analysts are blessed with boundless resources. Financial information is available everywhere online--sometimes free and accessible, other times purchased from special-services companies. Analysts, traders and researchers don't need to pore through dated paper 10-K reports or hard-copy financial statements. The tools that exist to streamline the analytical process are bountiful.
And now along come financial-services companies like Thinknum, which permit analysts to share their financial models online, accessible to anyone among the public looking for assistance, guidance or insight when it's time to analyze the financial condition of a company or assess its value. Thinknum was formed last year by banking and hedge-fund analysts, recent Princeton graduates, who thought the industry and broader marketplace could benefit from a financial-modeling clearinghouse that lets analysts pull from a virtual shelf any model or equity or debt analysis for whatever need that suits them.
Founders Justin Zhen and Gregory Ugwi told the CFA Institute that the new company's services are "radically open." They pattern the company after GitHub, a computer-software company that allows programmers to share their coding with the public, a collaboration that helps improve software and makes it available to anyone who needs it. Same idea for those who need and use financial models.
Thinknum acknowledges most equity research analysts present their work publicly, including the thousands of assessments of just about all publicly traded companies. However, they present their conclusions. They don't necessarily share their detailed models. Thinknum wants to display the analysis behind the conclusions and wants to help others build their own models based on the work of others.
Take Apple, Inc., the computer giant. If an analyst seeks to determine its intrinsic corporate value, based on a projection of earnings and cash flows, she can start from scratch and develop her own financial model and incorporate projections, scenarios, and assumptions. Or she could decide to examine the work and models of others, study them, and tweak and revise them for her purpose. She may disagree with others' assumptions of growth or may decide that a rise in interest rates may have little impact on the company's fortunes. Thinknum would permit the analyst to dial up and review others models (and projections and calculations of value) before immersing herself into the exercise.
Yes, she could copy their models and present them without adjustment or change, but those who share their work are aware their analyses might be used for any purpose. Or she could study them to gain insight--to find something new or to unearth a factor or variable she may have previously neglected. On Thinknum's site, with Apple, she can see the company valuation performed by a handful of analysts around the country, including one from a prominent business-school professor. She can explore the assumptions they used, the long-term business conditions they describe, and their attempts to project earnings and cash flow out several years.
Thinknum's founders say the forum, the sharing of models and model ideas, should reduce the labor of analysis, help analysts focus more deeply on valuation concepts, debt structures, business scenarios and management--less time on figuring out why balance-sheet items don't reconcile.
In certain industries, financial analysts already have access to private services that provide financial information, financial ratios, and ready-made spreads. But they come at a cost and typically an expensive contractual subscription. Other services, including, for example Google-finance, provide financial information and ratios, but stop far short of doing analysis or making an evaluation. Thinknum's services, meanwhile, are available as easily as it is to type " Apple" into a search box.
Will such services take off? Will they contribute to vast improvements in the work-life balance among young bankers? Not so fast, the big banks and hedge funds will say. They will argue they have privileged access to and use significant amounts of confidential information from client companies. That information, used as inputs in models and used to enhance them and make them more detailed, could never be offered to an at-large public forum. They will also argue that many models they use are proprietary and are specially designed in a way to give them an analytical edge above competitors. When Bank of America advises a client that a target company is worth X, the bank and the client will not want to convey to public markets how it derived the value X--at least not until it's necessary.
But give Thinknum the credit it's due, especially in its efforts to expose the details of how banks might determine whether a company can pay down millions in debt or how banks determine at what price a client should sell new stock or why a hedge fund might have discovered intrinsic value in an unpopular stock. There are much art, magic, intuition and mystique to deal-doing or trading, but much of it starts with a methodical, more scientific process, the process of assembling the financial numbers and getting them to tell us something about the future (future worth or value, or future ability to generate cash to meet obligations).
In some sense, banking will still be banking. The hours will still be long. Decades ago, because they were strapped with pencil and paper, bankers and analysts were satisfied with one or two business scenarios (based on growth rates, interest rates, or leverage ratios). In these times, because there is technology, two scenarios won't suffice, when a dozen or more can be performed and presented with the click of a button.
Tracy Williams
See also:
CFN: Mastering Technical Skills, 2010
CFN: Apple, With All That Cash, 2013
CFN: Verizon, Big Numbers, Big Debt, 2013
CFN: Who's Betting on Blackberry, 2013
CFN: New Financial Technology, 2014
CFN: The Most Popular MBA Professors, 2011
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