What is investment analysis. Investment analysis is the key to successful projects Fundamentals of investment analysis in financial markets

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Investing is passive income. Is it necessary to control the situation or is it enough just to assess the possible risks and profits? Below we will analyze how and why to conduct investment analysis, as well as what types it is.

Analysis of financial investments

Investment analysis is a complex of several methods for evaluating and predicting the feasibility and effectiveness of investing. Investment analysis gives an understanding of how right you are in your decision and allows you to draw correct and reasonable conclusions. In addition, such a procedure contributes to solving existing investment problems and finding alternative options.

It is the analysis of the investment activity of an enterprise that can protect against losses, because a well-thought-out and calculated strategy almost never leads to losses. Thus, investing is a rather complicated and serious way of earning, which requires utmost care and responsible attitude. A competent investor analyzes investments before, during and after the transaction, which adds to his experience and professionalism.

When to Analyze

The analysis of investment activity covers all periods of the transaction process from its planning to summing up. Investment analysis falls into two categories:

case study. It is carried out before the start of the transaction. It is very important for assessing the basic investment decision and covers all kinds of aspects that can further influence the course of business:
1. Definition of clear goals and specific task setting.
2. Calculation of the acceptable level of risk.
3. Definition of production and organizational plans.
4. social significance.
5. Project management strategy.
6. Evaluation of the qualities of participants and project managers.
7. Technical base and environmental safety and others.
Temporary study. Carried out throughout the investment process. It includes its control before making a profit and the creation of the conditions necessary for the development of the process.

Thus, investment analysis is not a short-term action, but a dynamic process. The aspects described above are the basics of investment analysis, without taking into account which you increase the likelihood of events that can work against you.

Why analyze

Investment analysis is carried out for:

Creating a clear plan that will ensure the implementation of the tasks.
Making the best decision from all possible alternatives.
Identification of possible financial, social, organizational and other problems at all stages of the future project.
Determining the feasibility of the project and the profit/risk ratio.

Investment analysis helps to determine the reality of the project goals and measure them against the costs of achieving them. The result of investment activity is the received profit or benefit, which should significantly exceed the costs of implementing the process. The return on investment must also match the investor's plans.

Analysis Methods

Methods of investment analysis depend on the object of investment. For real investments, the result should give an assessment of the success and effectiveness of the project. In this case, all involved areas will be covered - technological, managerial, assessment of tasks and others. With financial investments, the subject of research is the stock market, factors that can affect the price of an asset, possible risks and potential profits.

Analysis of real investments

To begin with, it is necessary to highlight some features that distinguish real investments from financial ones:

Longer payback period. As a rule, the income from real investments arrives somewhere in a year.
The amount of investment, in most cases, is significant.
Real investments are made to maintain or improve the development process of the enterprise. An analysis of the investment activity of an enterprise often shows the need for the changes made and their importance in the future.
Real investments cover several aspects of the enterprise.

Investment analysis methods include accounting and dynamic valuation. An accounting estimate evaluates cash flows and material values as a fact, not taking into account the time interval. This helps to understand the overall picture of what is happening and to notice the cardinal inconsistencies. The accounting estimate is used for simplicity and clarity. Dynamic assessment takes into account all changes in resources and investments over time, more accurately reflecting all ongoing economic processes.

The probability of investment inefficiency is predicted by mathematical methods. As a rule, this is the method of mathematical expectation and range of acceptable values. Permissible values are always individual and their values are determined by the investor himself. Analysis of investment activity allows you to determine whether the reality meets the requirements. To calculate the probability of risk, you must first determine the possible level of profitability of the project.

Financial investments cover fewer areas of activity. As a rule, in such investments, the investor is only interested in the financial side, namely, making a profit. Therefore, the study of investments of this type is aimed at the validity of the decision made and the forecast of further price movement. The most commonly used fundamental, technical and investment portfolio analysis.

Fundamental. Explores the possible causes of price movements, looking for their basis in the analysis of the global market, macroeconomic news. With fundamental analysis, the investor thoroughly studies the work of the company whose shares he wants to buy. He is interested in reports, profit growth, development news, biography of directors, economic sector. It always takes into account possible global shifts in the economy and international events.
Technical. Based on the theory that history repeats itself and price movements are subject to certain laws that can be identified and monitored. There are a lot of technical analysis strategies and indicators, each investor or analyst chooses the instrument he trusts. Repeated price changes in the past give a high probability of a similar move under the same conditions. For clarity and extrapolation of data, graphic images of the price and the indicators used are used. The received signals or repetitions of price movements become the reason for making or closing a transaction.
Investment portfolio analysis. This is a rather capacious process, covering the study of each instrument involved, possible risks and profits. The purpose of such an analysis is to create an optimal portfolio that would show the maximum possible potential profit with the minimum probability of loss. Analysis of the investment portfolio makes it possible to make the right diversification, taking into account the nature of the instruments, industries, correlation and other indicators.

Fundamentals of investment analysis of financial transactions necessarily include the calculation of profit and loss indicators. To minimize risks, many investors resort to diversifying transactions so as not to invest all their funds in one instrument. In this case, the analysis of the investment portfolio is mandatory and should be carried out by experienced analysts in order to avoid errors in the calculations.

Types of analysis

Investment analysis can be classified according to different criteria. However, the foundations of investment analysis of any kind are aimed at the same goals: project assessment, assessment of the reality of its achievement and assessment of economic efficiency. Small differences in the process of conducting research still exist. Investment analysis is divided.

Investments in any project or financial instruments require regular assessment of the feasibility and effectiveness of actions. It is also necessary to understand the risks, regular monitoring of the environment.

It is also important to understand how the investments made correlate with the desired results and parameters. Investment analysis provides it all.

It is also necessary at the end of the investment period in order to understand how successful they were, to study the mistakes made and to adjust the investment strategy for the future.

Investment analysis is a complex of various methods and techniques that help the investor decide how profitable this or that investment is. It determines everything: from the amount of profit to possible risks and alternative solutions. It remains only to use it wisely.

All methods and techniques of analysis are aimed at finding solutions for a more profitable investment. Only a small proportion of investments does not give the desired return for reasons that do not depend on the investor. The rest will be calculated by investment and marketing analysis. That is, its implementation contributes to improving the quality of investments.

It is important to understand that this is a process that occurs in dynamics and in the context of two planes:

subject;
temporal.

Actions and steps in the time plane imply project support throughout its entire existence, exploring and analyzing its state.

The subject plane conducts a meaningful analysis:

economic environment;
well-defined goals;
marketing, production and financial plans;
significance;
financial indicators.

Subject of analysis– connections of all processes and phenomena during investment, their economic feasibility.

An object- the activities of an enterprise or an individual investor who participates in investment activities.

Subjects- all who will use the data received, or those who are interested in obtaining positive results when making investments.

Important! It is not necessary to carry out all the calculations yourself. To date, various investment analysis technologies have been developed: the Alt Invest software product is the most popular here. With its help, business planning is easily carried out and an express analysis of the project is carried out, and the investment portfolio is calculated. You just need to enter the necessary data into the program, which will calculate everything for you.

The purpose of the analysis is to determine the effect that will be obtained as a result of the investment. Or in other words: it shows the difference between the benefits of the project and the costs that were incurred in the process of its implementation.

Investment and innovation analysis perform the following functions:

structures all the information that is necessary during the implementation of investments;
provides an opportunity to choose the most suitable option from several alternatives;
clearly and competently forms all the problems that appear in the process of project implementation;
leads the investor to the decision whether it is expedient or not to invest in the project.

Analysis Methods

The study of the expediency of the portfolio is carried out by two methods.

Analysis of real investments

This type of investment has its own characteristics that distinguish them from financial ones:

profit from such investments, on average, appears at least in a year. Whereas real investments can make a profit on the day they are made;
their volume is more significant;
in most cases, this is the embodiment of the company's strategic goals;
their implementation affects most objects in their environment.

There are two types of assessment here:

Dynamic. A basic type of valuation that applies discounting methods, thereby showing all possible outcomes more accurately.
Accounting. Gives conclusions on the project, not taking into account the time factor. A very simple and convenient method of analysis, but it is auxiliary.

Important! Marketing and production analysis can be part of the investment, if the latter is carried out when creating a business plan.

Analysis of financial investments

Here the most common are:

fundamental. It implies a study of the market as a whole, industries or individual products. Fundamental analysis of the investment market explores significant changes in the economy, the impact of events taking place in the world on the economy of all countries;
technical. Due to the analysis of past quotes and the price movement as a result of this, forecasts for the future are made. The results are obtained in the form of graphs, on the basis of which investors carry out their next steps;
portfolio. Analysis of an investment portfolio using the main criteria - risk and potential profit (see). The investor correlates possible risks, potential profit and decides where to direct his capital. Investment analysis will show the optimal portfolio that will bring the planned profit with an acceptable level of risk.

Important! Comparative analysis of investment ratings of regions is carried out by completely different methods. Here, it is not the results of investments that are evaluated, but, on the contrary, the state before their implementation. Although the result will be the same: how expedient is the investment.

Features of some types of analysis

Separately, we can highlight the investment gap analysis. Meaning: Determining the difference between where the organization is now and what it can be and achieve.

That is, identifying a gap, which can be:

between what position the company occupies in the market now and real demand;
between ongoing business processes and the initial vision of management;
between the goals and tasks that are being fulfilled and those that are really necessary;
between what the company is showing now and what the industry leaders are showing.

Investment gap analysis has one main goal - to identify the company's market opportunities that can be turned into strategic potential.

Summing up

When conducting a comprehensive analysis of investment processes in the region, it is impossible to use the above methods of analysis. This analysis implies, first of all, the economic benefits of investments, while investments in the region should take into account the social effect.

By studying the investment market, its concept, the main elements - the analysis of the state can be optimally carried out using various approaches to investment analysis. A well-conducted analysis opens up wide opportunities for investment.

When deciding on the implementation of an investment project, it is necessary to evaluate the economic effect of its implementation, compare the economic effect of investing in various projects, and take into account opportunity costs. Investing capital in a project should be more profitable than simply placing funds in risk-free securities or in a bank at interest at a given bank interest rate. Alternative projects should also be considered, their effectiveness should be assessed, and an investment project should be proposed for implementation that will bring the maximum benefit. When choosing an investment project, it is necessary to take into account its riskiness, and, consequently, the payback period, since the longer the payback period, the riskier the project. The higher the project risks, the higher the requirements for project profitability.

When evaluating the effectiveness of an investment project, it must be taken into account that the cash receipts and payments associated with its implementation are distributed over time and, therefore, are not comparable. The analysis of the dynamic series, the elements of which are net cash flows for the corresponding period, must begin with bringing the series into a comparable form. Accounting for the time value of money is carried out by discounting the future amount expected to be received (paid) at a given interest rate. The interest rate level represents the opportunity cost of owning funds (the lost profit that an investor could receive by placing these funds for a certain period, for example, on a deposit, investing them in securities or in another project), and the discounting procedure allows you to determine the real cost money at any given time.

The methods used in evaluating the effectiveness of investment projects can be divided into two groups. The first group includes valuation methods that take into account the time value of money and, therefore, are based on the use of the concept of discounting. The second group of valuation methods includes methods that do not take into account the time value of money and are based on accounting estimates. The most commonly used methods belonging to the first group are methods for determining the net present value of the project ( net present value, NPV); internal rate of return ( IRR); return on investment (profitability index, RG). The second group includes methods for determining the payback period of investments (payback period, RV) and accounting return on investment (return on investment, ROI).

One of the main methods of economic evaluation of investment projects is net present value method, by which the value of the company can increase as a result of the implementation of the investment project. NPV determines the monetary benefit from the project by discounting all expected cash receipts and payments to date using the required rate of return. NPV is determined by the formula

where CFk- Net cash flow; r- discount rate.

The discount rate is the choice price (opportunity cost) of a commercial strategy involving the investment of funds in an investment project. The discount rate is an exogenously set factor, its level is justified based on the understanding by investors of an acceptable level of return on capital, it characterizes the minimum level of return on capital invested in the project, at which investors consider it possible to participate in the project.

The net present value of a project is the difference between the discounted cash flow and the discounted investment. The equality of the net present value to zero means that the implementation of the project will provide investors with the required level of profitability, no more and no less, i.e. over the economic life of the investment will reach the desired level of return. A positive net present value indicates that during the accounting period the discounted cash receipts will exceed the discounted amount of capital investments and thereby ensure an increase in the value of the company, i.e. investments will provide the required level of return and additional income equal to the value NPV. In this case, the project is recommended for implementation. If the net present value is negative, the project will not provide the required level of return on investment, and, therefore, should be rejected. In the analysis of alternative projects, preference should be given to the project with a higher net present value.

The following method for evaluating the effectiveness of investment projects, based on the application of the concept of discounting, is method for determining the internal rate of return project ( IRR). The internal rate of return characterizes the return that the implementation of the investment project will provide, therefore, the cost of capital used to finance the project should not exceed its internal rate of return. As noted above, a net present value of zero means that the project will provide the required level of return (determined by the discount rate adopted), but will not bring additional income. Therefore, if you determine the level of the discount rate at which the net present value of the project becomes zero, the investor thereby determines the return that the project will provide.

The internal rate of return is a positive number r* that at the discount rate r = r" the net present value of the project goes to 0; for all values of the discount rate greater than the value of r* (r > r"), NPV takes a negative value; for all discount rate values less than r* ( r < r*), NPV takes a positive value. If at least one of these conditions is not met, it is considered that IRR does not exist.

The discount rate, which is the required level of return for the investor, and the internal rate of return, which characterizes the level of return provided by the project, are identical in their economic nature, since they characterize the level of income capitalization for the billing period. The difference is that the internal rate of return is formed on the basis of the internal properties of the project, and to determine it, an analysis of the project's cash flow is carried out, and the level of the discount rate is justified based on the investor's understanding of an acceptable level of return on capital. To determine the internal rate of return of the project, it is necessary to find the discount rate at which the net present value of the project goes to zero;

This equation in general form does not have an exact solution. In practice, the solution of Equation 4.2 is reduced to a sequential iteration, with the help of which the level of the discount rate is found, providing a zero value NPV. Determine the value IRR can be done by computer, graphical method or linear interpolation method. The method of linear interpolation is reduced to the fact that two discount rates are selected, one r 0 - providing a negative value NPV project, other r 1 is positive. Thus, we have two values of net present value: NPV(r 0) < 0 и NPV(r 1) > 0.

Then the internal rate of return is calculated by the formula

(4.3)

Since the internal rate of return characterizes the guaranteed level of return on investment, in order to assess the effectiveness of an investment project, its value must be compared with the level of the discount rate (an acceptable level of return on investment). The project is recommended for implementation if IRR > r. Projects that have IRR< r, ineffective. If the internal rate of return and the discount rate are equal (IRR = r) income provides an acceptable level of profitability (only pays for investments, investments are not profitable).

It should be noted that when determining the internal rate of return, the conditions for its existence are stipulated. If at least one of these conditions is not met, it is considered that IRR does not exist. According to modern concepts, the internal rate of return is defined only for standard ("typical") financial flows, i.e. those for which equation 4.2 has one solution on an economically justified task interval IRR. For such investments, the statement is true: the higher the discount rate G, the smaller the value of the integral effect NPV(Fig. 4.1).

Rice. 4.1. Magnitude dependencyNPV from the discount rater

The point at which the curve that characterizes the dependence of the net present value of the project on the discount rate crosses the abscissa axis is the internal rate of return of the project IRR.

In practice, there are projects when costs can be incurred not only at the beginning, but also in the middle or at the end of the billing period (Fig. 4.2). At the same time, the dependence NPV(r) may differ from that shown in Fig. 4.1. For example, it may be as shown in Fig. 4.2 or otherwise.

Rice. 4.2. AddictionNPV from the discount rate in case of non-standard financial flow

The curve in the figure crosses the x-axis three times. This example is characterized by a non-standard ("atypical") financial flow. Here NPV takes on zero value at the discount rate: r 1*, r 2*, r 3*. This type of schedule is explained by the fact that not only receipts are discounted, but also expenses. Accordingly, as the discount rate increases, the present value of future costs decreases.

The disadvantage inherent IRR for projects with extraordinary cash flows, is not critical and can be overcome. Analog irr, which can be used in the analysis of any projects is called modified internal rate of return (MIRR). Calculation algorithm MIRR next:

– the total discounted value of all outflows and the total accrued value of all inflows are calculated. Both discounting and building up are carried out at the accepted discount rate (the cost of the project financing source);
- a discount rate is determined that equalizes the total discounted value of outflows and the total accrued value of inflows, which is MIRR.

Calculation of the modified internal rate of return of the project is carried out according to the formula

where OF k - cash outflow in the period k(absolute value); IF k - cash inflow in the period k(absolute value); G - accepted discount rate (value of the project financing source); P- duration of the project.

Unlike the internal rate of return of a project IRR modified internal rate of return MIRR always has a single value and can be used not only to evaluate the effectiveness of investment projects with ordinary cash flows, but also to evaluate extraordinary cash flows, when the application IRR impossible.

The modified internal rate of return exceeds the accepted discount rate.

One of the common methods for evaluating the effectiveness of investment projects is method for determining the return on investment (PI). The return on investment ratio is a relative indicator and allows you to evaluate the margin of safety, demonstrating to what extent the value of the company increases per 1 ruble of investment. This indicator characterizes the relative return on the costs invested in the project.

The calculation of this indicator is carried out according to the formula

where - investments in the year:; - cash receipts per year, which will be received thanks to these investments.

In the case when the costs are incurred only at the beginning of the project, formula 4.5 takes the form

where PV- the present value of cash receipts; - the amount of investments (capital investments) in the project.

The meaning of the PI coefficient is to select independent projects with a value greater than one. It gives analysts a reliable tool for ranking various investment projects in terms of their attractiveness, but does not characterize the absolute value of net benefits.

Payback period determines the time required for the receipt of cash from the invested capital.

In the presence of annual uniform cash flows, the payback period RV is determined by the formula

In the presence of uneven cash flows, the payback period is determined on the basis of the accumulation of net cash flows until the initial investment is recovered. If the calculated payback period is less than some maximum allowable payback period, then this project is accepted.

When determining the payback period of investments, the time value of money is not taken into account. This disadvantage can be eliminated by calculating the discounted payback period ( DPB). Determining the discounted payback period involves determining the current (present) value of all future receipts and costs (building a discounted cash flow) and determining the payback period based on the discounted flow . Discounted payback period determines the time required to return the funds invested in the project, taking into account the required return.

Another fairly simple method for evaluating investment projects is method of calculating accounting return on investment (ROI). This indicator is focused on the evaluation of investments based on the accounting indicator - the income of the company, and not on the basis of cash receipts. There are different calculation algorithms ROI, in particular (common algorithm) ROI is determined by dividing the average annual profit of the project by the average investment costs.

Example

It is necessary to evaluate the effectiveness of the investment project discussed in paragraph 4.1, provided that the cost of equity is 20%.

Traditional scheme.

The above example shows the calculation of cash flows according to the traditional scheme. In order to evaluate the effectiveness of these investments, we construct a discounted cash flow. The discount rate is equal to the weighted average cost of capital ( WACC). The weighted average cost of capital is calculated using the formula

where is the share of capital (investment resources) received from source i;

is the cost of the i-th source of capital.

To finance the project, not only own, but also borrowed capital is attracted, therefore, the profitability of such a project must compensate not only the risks associated with investing own funds, but also the costs of raising borrowed capital.

where is the rate of return on equity; is the share of equity capital; is the rate of return on the company's borrowed capital (the cost of raising borrowed capital); is the income tax rate; is the share of borrowed capital.

The total amount of the project capital is (9000 + 6000) = 15,000 thousand rubles.

The discount rate will be

In table. 4.4. the construction of discounted cash flows of an investment project according to the traditional scheme is presented.

Table 4.4

The net present value will be:

(NPV is 13,361.3 thousand rubles), then the project is assessed as effective and is recommended for adoption.

NPV(in thousand rubles) at various discount rates are presented below.

	Discount rate (g), %

NPV project goes to zero, is the internal rate of return (Fig. 4.3). Thus, the internal rate of return of the project (IRR) is 46%.

Rice. 4.3. AddictionNPV project from the discount rate in the traditional cash flow calculation scheme

The internal rate of return of the project exceeds the selected discount rate (14.7%), which indicates the effectiveness of the project.

Calculate the modified rate of return of the project. The total discounted value of all outflows will be 15,000 rubles.

The total accrued value of all inflows will be

mirr, is determined by formula 4.3 as follows:

The project is accepted if MIRR > r. The condition is met.

Determine the payback period for the project. The cumulative cash flow of the project is presented in Table. 4.5.

Table 4.5

Payback period of the project (RV) will make up. This means that the company will return the money invested in the project in almost 2 years.

To determine the discounted payback period, it is necessary to build a cumulative discounted cash flow (Table 4.6).

Table 4.6

The discounted payback period will be

In 2.5 years, the company will not only return the money invested in the project, but also provide the required level of return on them.

Equity scheme:

The calculation of cash flows under the equity scheme is presented in paragraph 4.2. Let's build a discounted cash flow (Table 4.7).

Table 4.7

Net present value:

Since the net present value of the project is positive (NPV is 11,580.4 thousand rubles), the project is assessed as effective and is recommended for adoption.

Return on investment will be:

The value of return on investment, exceeding one, indicates their effectiveness.

We will determine the internal rate of return of the project, for which we will use the graphical method. Let's plot the dependence of the net present value on the discount rate. Calculation results NPV at various discount rates are presented below.

	Discount rate (g), %

The discount rate at which NPV the project goes to zero and is the internal rate of return (Fig. 4.4). Thus, IRR is 86%.

Rice. 4.4. AddictionNPV project from the discount rate in the scheme for calculating cash flows based on equity

The internal rate of return of the project exceeds the chosen hundred discount rate (20%), which indicates the effectiveness of the project.

Calculate the modified internal rate of return of the project. The total discounted value of all outflows will be 6,000 rubles.

The total accrued value of all inflows

The discount rate that equalizes the total discounted value of inflows and the total accrued value of outflows, which is mirr, determined by the formula. From here:

The project is accepted if MIRR > city The condition is met.

Determine the payback period for the project. The cumulative cash flow of the project is presented in Table. 4.8.

Table 4.8

Payback period of the project ( RV) will be: 1.15 years = (1 + 789.7 / 5172.2). This means that the company will return the money invested in the project in almost 1 year 2 months.

To determine the discounted payback period, it is necessary to build a cumulative discounted cash flow (Table 4.9).

Table 4.9

The discounted payback period will be: 1.5 years = (1 + 1658.1 / 3591.8). In 1.5 years, the company will not only return its own funds invested in the project, but also ensure the required level of return on them.

Comparing the key quantitative indicators of the effectiveness of an investment project calculated according to the traditional scheme and according to the equity scheme, we conclude that the assessment of the same project depends on the method adopted (Table 4.10).

Table 4.10

The difference in estimates is explained by the fact that, within the framework of the traditional approach, the investor evaluates how efficiently all the capital invested in the project (own and borrowed: in this case, all 15,000 thousand rubles) works, while within the framework of the equity method, he evaluates the effectiveness of only his own capital (6,000 thousand rubles of own funds invested in the project). The efficiency indicators of the use of all capital can coincide with the efficiency indicators of equity capital only when the share of borrowed capital is equal to zero.

Discounted cash flow generated by all capital invested in the project (PV= RUB 28,361.3 thousand) exceeds the adjusted return on equity (PV = RUB 17,580.4 thousand), and the net present value under the traditional scheme is higher than under the equity scheme. However NPV is an absolute indicator. If we consider the relative performance indicators (ROI PI and internal rate of return IRR), then they are higher when evaluating the effectiveness of the equity scheme. That is, the efficiency of using equity capital is higher than the efficiency of using all capital (own and borrowed) invested in the project. This is due to the effect of financial leverage.

Investment analysis is a set of actions that allow you to evaluate the effectiveness of investments in a particular project. Let's consider the methods of such an analysis in order to understand how to avoid mistakes in evaluating the effectiveness of investment projects.

Tasks of investment analysis

Investment analysis is a set of actions that allow you to evaluate the effectiveness of investments in a particular project. Correctly and timely carried out mechanism solves the following tasks:

Determines the compliance of the project with the strategic development goals of the investor company;
Estimates the planned need for investments, distributed over the planning horizon;
Calculates the optimal financing structure;
Identifies factors (threats and opportunities) that can significantly affect the project;
Determines the compliance of cash flows with the expectations of beneficiaries;
Identifies key development points for subsequent control of quantitative and qualitative indicators

The result of the analysis of investment projects is a package of documents for making an investment decision. The composition of the package of documents may vary, but the main components can be distinguished:

Main stages of investment analysis

At the first stages, information is collected, data is analyzed to form a package of documents. This stage is called pre-project or pre-investment.

During this period, the collection and initial analysis of information takes place, but the decision on financing directly to the project has not yet been made. When a positive decision is made, the implementation phase of the project begins. The objective of this stage is to achieve the investment goals set out in the approved project documents. The completion of an investment project is its reclassification into operating activities or exit from the project.

The conclusion of the working group is an approved document in which the working group of the pre-project stage presents a reasoned point of view. This is an expert opinion that was not reflected in other documents of the investment analysis, but at the same time is essential for making a decision.

It is possible to avoid errors in the evaluation of investment projects and, as a result, incorrect conclusions if the rules for conducting investment analysis are approved by a separate regulation. We will tell you how to prepare such a document,

A teaser or prospectus is a document summarizing the initial analysis. Based on this document, a decision is made on the start of the pre-project stage or the refusal to invest.

There are many options for classifying projects depending on the goals, the amount of investment, the timing of implementation and the form of ownership. From the point of view of organizing the investment process in a commercial company, it is advisable to single out the following groups of investments:

Real - represent financial investments in the acquisition or creation of real tangible or intangible assets;
Financial investments are generally associated with the acquisition of securities without active involvement in operations.

Real investments should be divided into:

business projects;
organizational projects.

The meaning of the separation is that the return on business projects can be reliably calculated, while it is rather difficult to calculate the income from the implementation of organizational projects. For example, it is difficult to calculate the investment return on the implementation of an ERP system in a company. In this case, only costs can be estimated relatively reliably.

Before making a decision on the implementation of a new investment project or comparing it with alternative ones, it is necessary to make sure that no mistakes were made when evaluating its effectiveness. This solution will help to detect flaws in the calculations and correct them.

Business plan and financial model

Business plan is the main document of investment analysis. The main section of the business plan is the financial model. All other sections of the business plan are presented to support the financial projections reflected in the model.

The financial model defines:

Cash flows of the project;
Volume and schedule of financing;
Project performance indicators;
Schedule for receiving income from the project;
Change of financial forecasts depending on various scenarios of project implementation.

An example of the financial model of an investment project and the calculation of performance indicators is presented in the file below (the file should be opened with the iterative calculation mode active).

Investment analysis methods

The basis of investment analysis is the construction of a model of return on invested capital. The discounted cash flow method is used to calculate the return on invested capital.

The main performance indicators of the investment project, calculated using the discounted cash flow method, are:

n, t	time period (usually model year, quarter or month)
CF (Cash Flow)	cash flow generated by the project in forecasts
i	discount rate (cost of invested capital)

Where: IC - initial investment;

In the attached example of a financial model, the indicators of the investment attractiveness of the project convinced investors of the prospects of the project. In general, there are more than 100 additional indicators that can be used when analyzing the results of calculations. They should be chosen based on the priorities dictated by the project and the financial capabilities of the investor.

When analyzing the calculation results, you should also pay attention to the following:

1. Source of income should be clear. It is important to solve the problem of producing a quality product, but this is not enough. It takes no less effort, time and resources to get the product of the project on the market. And here it is important to understand what exactly the project will offer the market in order to attract a buyer.

2. A separate project team analysis. A strong team is able to maximize revenues or rebuild a project if it fails. A weak team will critically reduce the potential of any project. If it is initiated by a third-party company, then special attention should be paid to the analysis of the reputation and financial condition of a potential partner.

3. Financial plan should be synchronized with the action plan reflected in the business plan.

4. The business plan should pay attention not only to financial forecasts, but also to analysis of non-financial indicators. For example, monitoring planned product testing activities will provide the necessary information before it is reflected in the financial results.

5. Risk is present in absolutely every investment. Sensitivity analysis and scenario analysis should provide an answer to the question of changes in the financial performance of the project depending on various assumptions. Investors should present the possible consequences in case of failure or additional income in case of more successful implementation. Cm.,

6. In addition to the main indicators (NPV, IRR, DPP and PI), priority should be given to directly planned cash flows. How realistic are the cash flows generated by the plan? Does the planned dynamics correspond to the current practice?

7. The presence of a sharp increase or decrease in any financial indicators (for example, revenue or profitability) must be justified. If there is no reliable justification, then the calculations should be additionally checked and the forecasts revised;

8. Splitting the project into key stages can significantly save resources. If a key milestone is not achieved, reasons should be carefully analyzed before funding the next milestone;

9. Providing the project with resources and high motivation of the project team is not enough. Attention should be paid to balanced monitoring and review during project implementation. The project team, in whole or in part, does not risk its own funds, in addition, the goals of the performers and the investor differ from each other. Control is designed to balance interests and promptly inform about the upcoming threat. Investment analysis does not end at the stage of making a decision on project financing. On the contrary, in this case, investment decisions will have to be made constantly.

Summary

Conducting an investment analysis is a prerequisite for making significant investment decisions. The quantity and quality of the analyzed indicators, a package of documents and recommendations is formed individually for each project. The result of the investment analysis should give an unambiguous recommendation - to invest in the project or to refrain from this step.

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