How Do I Perform a Financial Analysis Using Excel

Whether you are an investor or a financial analyst, possessing extensive working knowledge of Excel and mastering foundational Excel functions can be invaluable. While it may seem nearly impossible to master every Excel feature, you must have a minimum knowledge of performing financial analysis using excel. If that is what you are looking for, you have come to the right place. Let us find out more about it here.

Importance of Excel for Finance Professionals

Excel is the choicest tool in the finance domain for financial analysis and insights, compiling non-numerical data and crunching numbers. Below mentioned are some points that highlight the importance of Excel for finance professionals:

  • Allows Substantial Analysis

Excel provides users aptitude to tackle intense qualitative analysis, which is a massive part of why this tool is invaluable in finance and accounting. You can input and interpret vast chunks of data and discern the direction of statistics and numbers as you continue manipulating them. 

  • Will Move You Up the Ladder in the Corporate World

Excel is the fundamental tool for most accounting companies, used to predict and facilitate a company’s growth. It also helps in decision-making and determining the system’s requirements and the changes that should be implemented. 

Excel for Investors

You can effortlessly keep a tab on your investment holdings with an Excel spreadsheet. The first step here is to decide the data that you would like to include, such as:

  • Entry
  • Date
  • Size (the number of shares)
  • The closing price for a specific date
  • Difference between the entry and the closing price
  • Percentage return
  • Standard deviation
  • Profit and loss for every periodic closing price

In Excel, you can use a different sheet for every stock in your portfolio. 

Top 10 Excel Functions for Finance

Here are the top ten important Excel functions for finance that everybody should know:

  • XNPV

XNPV Formula = XNPV (discount_rate, cash_flows, dates)

If your valuation analysis’s objective is to determine a company’s worth, you will have to figure out the Net Present Value (NPV) of a series of cash flows. XNPV considers specific dates for cash flows. Thus, it is more precise and useful.

excel for finance xnpv function

  • XIRR

XIRR Formula: XIRR (cash flows, dates)

This one is closely linked with XNPV but helps comprehend the Internal Rate of Return (IRR) for a series of cash flows provided on specific dates. 

XIRR is a top Excel function in Finance

  • MIRR

MIRR Formula: MIRR (cash flows, cost of borrowing, reinvestment rate)

This is another version of IRR and is highly crucial for finance professionals. Here, the M denotes Modified, and this formula is used in case the cash from one investment is being invested in another investment. 

mirr Excel function

  • PMT

PMT Formula: PMT (rate, number of periods, present value)

This is a common Excel function. With the help of an interest rate, a number of periods (months, years, etc.) and the present value of the loan, you can comprehend the regular payments. This formula comes up with a total payment, including principal and interest.

pmt excel for finance

  • IPMT

IPMT Formula: IPMT (rate, current period #, total # of periods, present value)

IPMT helps calculate the interest portion of fixed debt payments. This function works well along with the PMT function. By separating the interest payments in every period, you can come up with the principal amount in every period by considering the difference between IPMT and PMT. 

ipmt function in Excel

  • EFFECT

Formula EFFECT: EFFECT (interest rate, # of periods per year)

This function helps you conclude the effective annual interest rate for non-annual compounding. This is a crucial function for you if you are involved with borrowing or lending. 

  • DB

DB Formula: DB (cost, salvage value, life/# of periods, current period)

This formula can be used in Excel to determine your depreciation expense for each period

DB function in Excel for finance professionals

  • RATE

RATE Formula: 

RATE (# of periods, coupon payment per period, price of a bond, the face value of a bond, type)

The RATE function is generally used to evaluate the Yield to Maturity for a specific security. This function is useful for finding out the average annual rate of return earned from the purchase of a specific bond.

yield to maturity function in excel

  • FV

FV Formula: FV (rate, # of periods, payments, starting value, type)

If you wish to know the amount of money you will have in the future, this function is useful, given that you have a starting balance, a compounding interest rate and regular payments.

future value formula

  • SLOPE

SLOPE Formula: SLOPE (dependent variable, independent variable)

This function lets you calculate Beta, given that you have weekly returns for a specific stock and the index to which you want to compare it. 

How to Make Investment Decisions Using Excel?

With Excel, you can make investment decisions by:

  • Calculating the Average Return and Standard Deviation for Stocks

Let’s assume you wish to calculate the monthly returns for Amazon stocks. For this, you can use the following formula:

Monthly return = Ending Price – Beginning Price / Beginning Price

An Excel screenshot the ending price and monthly return of Amazon’s stock price for 13 months. The average monthly return is 0.0330. The standard deviation is 0.0933

  • Calculating the Average Return and Standard Deviation for Portfolios

Suppose your portfolio contains four different stocks: Amazon, CVS, Apple and Netflix. You can create an equally weighted portfolio, with each stock having 25% of the weight. You will use the following formula to do the calculation:

Return = 0.25 x RAmazon + 0.25 x RCVS + 0.25 x RAaple + 0.25 x RNetflix

The Excel screenshot shows the Average Return and Standard Deviation for a Portfolio containing four-stocks: Amazon, CVS, Apple, and Netflix. The monthly average return and standard deviation is calculated for the individual stocks, as well as the entire portfolio. It shows that the portfolio has a Monthly Average Return of 0.0269 and a Standard Deviation of 0.0710.

  • Calculating the Stock’s Beta

To calculate the Beta of a stock, you will need a monthly return for the market and the monthly return for that stock. This can be done by using a scatter plot to create a graph. For this:

  • Open Excel
  • Visit Insert tab
  • From the Chart menu, select the scatter plot option

    An Excel screenshot shows how to create a scatterplot using excel. The data for the monthly return for two stocks, SPY and AMZN are placed in columns B and C, respectively. These columns are selected. On the insert tab, the scatterplot icon is selected, revealing the different types of scatterplots available for this data.

By doing so, a chart will get inserted that will look like this:

A screenshot of scatter plot created in excel. The scatterplot is over the data that was entered into the Excel sheet.

How Can Excel Template Help in Financial Analysis?

The pre-made Excel templates save time and allow you to understand the financial performance in crucial areas. All you would have to do is choose a template, enter data, and it will automatically bring the results. 

Conclusion

Understanding Excel’s basic functionalities can help you generate quicker results and upgrade your professional skills. So, being a financial analyst, get started with all the functions mentioned above and start creating results seamlessly. 

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