Consolidation of Financial Statements: A Brief Introduction

In finance terms, consolidation refers to the incorporation of the financial statements of all subsidiaries into the financial statements of the parent company. Consolidation of financial statements requires the parent company to integrate and combine all its financials to create a standard-form income statement, balance sheet, and cash flow statement, as part of a set of consolidated financial statements. Consolidation of Group Financials As per IFRS 10 Consolidated Financial Statements, consolidated financial statements are where the company presents all assets, Read more…

Forecast Sales Performance and Seasonality

We are approaching the second half of the year, and before we know it, it will be the time of year to start working on our projections for next year and the company’s annual budget. There are many complex and detailed models that we can utilize to forecast the sales performance of the business for the next period. However, I have recently noticed that almost every time I do work for a client, I end up using the most simple Read more…

How to Calculate the Beta of a Company

Beta is a risk-reward measure from fundamental analysis to determine the volatility of an asset compared to the overall market. We consider the market to have a beta of one. Then all assets are ranked based on their deviation from the market. If an asset’s returns fluctuate more than the market, then this asset has a beta of above one and vice versa. Higher coefficient is often associated with increased risk, but it also brings the potential for higher returns. Read more…

Black-Scholes Model: First Steps

Today we take a look at the most popular options pricing model. The Black Scholes Model, also known as the Black-Scholes-Merton method, is a mathematical model for pricing option contracts. It works by estimating the variation in financial instruments. The technique relies on the assumption that prices follow a lognormal distribution. Based on this, it derives the value of an option. It is more suitable for path-independent options, which the investors cannot exercise before their due date. This makes it Read more…

Sharpe Ratio and Risk-Adjusted Returns

In finance, one of the popular methods to adjust return rates of investments for risk is the Sharpe Ratio. William F. Sharpe developed the ratio in 1966 and revised it in 1994 to arrive at the formula we use today. Originally he called it the ‘reward-to-variability’ ratio. Later on, finance professionals started referring to it as the Sharpe Ratio. Investors use the Sharpe Ratio to understand how the return of investment compares to its risk. It’s the average return above Read more…

Optimal Portfolios and the Efficient Frontier

There’s a widespread assumption in investing that more risk equals increased potential returns. The theory behind the Efficient Frontier and Optimal Portfolios states that there’s an optimal combination of risk and return. The theory relies on the assumption that investors prefer portfolios that generate the most substantial possible return with the least amount of involved risk. We refer to these as optimal portfolios, and they form the efficient frontier curve. Optimal Portfolio An optimal portfolio is one that occupies the Read more…

Understanding the Binomial Option Pricing Model

The Binomial Option Pricing Model is a risk-neutral method for valuing path-dependent options (e.g., American options). It is a popular tool for stock options evaluation, and investors use the model to evaluate the right to buy or sell at specific prices over time. Under this model, the current value of an option is equal to the present value of the probability-weighted future payoffs. It is different from the Black-Scholes model, which is more suitable for path-independent options, which cannot be Read more…

Calculate Value in Use under IAS 36

The core underlying principle of IAS 36 Impairment of Assets is that an asset’s carrying value in the financial statements of the company should not exceed the highest amount the business can recover through its use or sale. The standard applies to all assets for which there are no impairment considerations elsewhere. As an example, when we test inventory for impairment, we follow IAS 2 Inventories, as it has specific stipulations concerning materials and goods. For some assets listed in Read more…

Introduction to Probability Distributions in Financial Modeling

In one of our recent articles, we looked into how to set up and run Monte Carlo Simulations in Excel. And we looked at some of the most common probability distributions, which we can apply to illustrate the uncertainty of our model’s variables. When we work on a financial model, we face issues with variables that are uncertain or hard to estimate with the required degree of accuracy. An example can be the expected returns of a stock. We have Read more…

Rolling Forecasts in Financial Planning

Let’s start by looking at why businesses need rolling forecasts. When running a business, we need to have a full view of what’s happening so that we can make the proper decisions. The best way to achieve this is to implement a budgeting and planning process. We create an expected standard performance for the business and can then evaluate the actual results and take the necessary changes to course correct. We do this evaluation by performing a budget to actual Read more…