Fundamentals of Investment Analysis

We again return to the issues of development strategy, investment policy, evaluation of the effectiveness of investment projects. An integral part of business management is an end-to-end analytical tool that the company's management uses whenever it needs to make a decision. This special accounting-based system function is used for various purposes, the main of which are related to real investments. Investment analysis as a comprehensive tool for the investment process is considered in this article.

Concept and classification of investment analysis

I like to refer to the fundamental concepts of management events and actions. Why? Probably because without scientific knowledge in the subtle "matters" of investment practice it is quite difficult to understand. And one of the postulates of this knowledge is the understanding of the subject of the studied categories, the concepts of which make it possible to build axiomatic foundations for the development of methodology. We are in the conceptual field of the investment sphere, and to the adjective "investment" we can add:

strategy;
process;
activity;
politics;
project;
risk;
analysis.

Concepts are the essence of the phenomenon, and if the semantics of phrases are different, it means that behind them there is an excellent content that has a special meaning in practice. Please note, whatever concept we take from the presented list, the analysis is relevant to each of them. Let's analyze the elements of the phrase "investment analysis" (IA). From the standpoint of the scientific method, analysis (from analysis (Greek) - dismemberment, decomposition) is the process of mentally dividing the object under study into parts. The analyst asks: "What is happening in essence, what are the structure, composition, properties and interconnections of the parts of the object?" The essence never lies on the surface, which means that the object of study must be dissected or divided into parts.

Model of an analytical-synthetic procedure. Source: Study guide for MBA students. Author - Goncharova S.G.

As you know, the correctness of the analysis is determined by the results of the synthesis of the object, which allows to one degree or another to clarify the essence of the object, to compare it with other similar objects according to the criteria of analysis and synthesis. Next, consider the adjective "investment". It defines the specifics of the analysis associated with decisions at a higher and lower levels of their adoption from strategy to specific project-type tasks. The expressed position defines the foundations of the concept of investment analysis.

In applied terms, under the IA we mean a complex analytical activity aimed at obtaining a justification for making an effective investment decision. Systems and methods of investment analysis reproduce the methodology of financial and economic analysis, of which they are a part. The strategic type of IA, the evaluation of investment programs, projects and individual operations form two interconnected contours of analytical and evaluation procedures.

Due to the presence of several investment-related circuits, the division of analysis into types is of particular importance. Below is a classification of AI based on a number of features. The main features are the level and moment of the procedure, regardless of its type.

Classification of IA types in a commercial organization

Subjects and objects of IA

The content and structure of investment analysis is largely determined by its subjects, subject and objects. By the subjects of IA, we mean the persons who directly do the analysis, and the circle of participants in whose interests it is performed. In this case, we will divide the performers into persons participating in the strategic IA, and persons performing investment analysis related to the project choice and the implementation of real investments. The analysis prior to the development of an investment strategy involves:

Director of Development;
financial director;
Commercial Director;
Chief Engineer;
executives representing centers of investment in the company.

In IA, performed at the project level, the named leaders are assigned a more supervising function, and the direct execution of the analysis is carried out by:

financial and economic service;
accounting;
marketing service;
chief technologist service;
capital construction department;
other services related to the project.

The structure of services participating in the IA projects can be universal and formed for a campaign of selection and selection of projects in a portfolio, or it can be created for each project in a unique format. IA are also performed by specialized subdivisions of external stakeholders: banks, consulting and insurance companies. The subjects making decisions based on the results of the completed IA include:

investors;
the head of the company;
a strategic planning session group;
credit committees of banks;
suppliers and buyers (in some cases);
representatives of other interested organizations and authorities.

The subject of IA is determined by the cause-and-effect relationships of financial processes occurring as a result of the company's investment activities, the parameters of the accompanying socio-economic efficiency. The results of the research carried out make it possible to correctly assess the directions and sizes of investments, substantiate business plans, and find reserves for improving processes. The objects of the IA are the results of actions of the corresponding level.

The model of the strategic investment position of the company.
Strategic investment plan.
The structure and composition of the investment portfolio of the enterprise.
Project programs.
Local projects.
Selected investment operations, for example, in the financial sector.

The structure of the options for the IA system in the company depends on the industry of activity, the scale of the enterprise, the level of development of regular management. As a rule, it is built from top to bottom from the strategy and from the present moment to the future, in which a retrospective analysis is carried out after the implementation of project tasks. An example of the composition and relationships of IA is shown below.

Variant of the composition and relationships of the IA of a mid-level company

Strategic AI methods

Investment strategy development is part of the overall strategic process. Before decisions in this area can begin to be made, a strategic investment position model must be created. It comprehensively characterizes the opportunities for the development of the enterprise in the priority areas of development of investment activities. Systems and methods of investment analysis for developing a strategy are divided into three blocks. The first block is related to the study of the macro- and microenvironment of the company in order to obtain a complete picture of the investment environment in which it operates:

SWOT analysis;
PEST analysis;
SWN analysis.

The second block of IA has a dual nature and uses the basics of financial strategic analysis. It forms the preconditions for decisions on the general financial development strategy and on the local investment strategy. The following models and methods define the content of this group:

business performance assessment using the SOFIA method;
model of sustainable growth of the firm;
appraisal of the company's value;
matrices of the company's financial strategies.

The third block of the strategic IA provides a solution to the problem of finalizing ideas, investment directions, identified uncertainties. This block uses three types of analysis: portfolio, scenario and expert. Portfolio analysis refers to the stage of marketing analysis, at which business units are compared and recommendations are made on the priorities for allocating resources for their development.

When conducting research, there are almost always several areas of strategic uncertainty that can pose serious threats to future implementation. The scenario method of IA allows to avoid them. The simplest technique is based on considering three scenarios for the development of events as a result of investment models of pessimistic, optimistic and most probable scenarios.

The types of the first block are generally known from strategic management, so I will restrict myself to the characteristics of the financial block IA methods. The SOFIA model is not only a set of methods of financial strategic management, but also an integral financial management system, in which special attention is paid to investment strategy, its assessment and implementation. The main components of this system are shown below.

The composition of the components of the SOFIA system

In the model of sustainable growth of a firm, the proportionality of the rates of increase in revenue from sales, profits, assets, equity and debts of the company is assessed. The method allows you to prepare solutions for the strategic balancing of finance, including in the investment area. Assessment of the company's value allows you to assess the effectiveness of business management in the past. With the help of matrices of financial strategic models (authorship of BCG), an understanding emerges whether a company has investment opportunities or not.

Simplified diagram of the matrix of financial strategic models

Design level IA

Analysis of investment projects is aimed at obtaining conclusions that allow choosing projects for implementation, ensuring the achievement of the intended results in the course of monitoring implementation and adjusting the investment process following their closure. Below you will find an algorithm for selecting a project based on the IA. Analysis of the effectiveness of investment projects occupies the central part of the financial and economic analysis, which, in turn, is the main IA in the system of comprehensive assessment of the plan of strategic investment measures.

Algorithm for accepting an investment project for execution based on the results of the IA

Local tasks of the project IA include the following.

Assessment of compliance with the required conditions for investing in the project in accordance with the investment policy and strategy.
Justification of the sources of financing for the project and their cost.
Establishment of factors influencing the results of the project, in fact, differ from the planned values.
Finding an acceptable risk / return ratio for the project for the investor.
Formation of recommendations for improving the quality and efficiency of investments in further practice on the basis of retrospective generalizations.

General model of financial and economic analysis with the transition to the IA of the project

Above is a figurative model of the transition from three strategies to methods of IA projects based on performance parameters. It should be emphasized that the methods of analysis of investment projects are based on the assessment of cash flows as real events of a practical plane. In this, the IA differs, for example, from the analysis of the economic activity of an enterprise. The AHD study is based on the income-expenditure concept of assessing efficiency, based on the principle of accrual, and not cash-flow.

Among the applied methods of IA projects, the following types of analyzes and assessments should be named:

overall project efficiency;
the effectiveness of participation in the project;
efficiency of the project, taking into account inflation (in forecast and deflated prices);
sources of investment resources;
project efficiency using simulation models;
financial stability;
risk aspects of project implementation;
the impact of project implementation on the performance indicators of the entire company.

In this article, we examined the investment analysis in a commercial organization from the perspective of two levels: strategic and project. Naturally, both of these aspects are closely interrelated and constitute a logical sequence from the development of an investment strategy and policy to the solution of specific project tasks. The IA of financial investments remained "overboard" of our attention, and this does not pose a problem, since articles on this topic are planned. In any case, in my opinion, the introduction to the subject area of investment analysis took place, and we got the opportunity to further analyze in detail specific applied tools.