Financial Analysis Report Project
Challenge
As part of The Forage’s financial analysis job simulation, I acted as a junior financial analyst on behalf of the New York Jobs CEO Council, an organization in the banking industry. My task was to analyze the financial health of a fictional company called Stargaze to determine whether it is a wise move to form a relationship with the New York Jobs CEO Council. To do so, I calculated financial metrics, compared them with industry averages, and formed recommendations regarding a financial relationship.
Findings
First, I produced a quarterly report including metrics for revenue, operating income (EBITDA), net income, and more. From these metrics, I discovered that expenses took up the majority of Stargaze’s revenue. Operating income drops significantly in the fourth quarters of 2021 and 2022, indicating an extra financial burden that the company must deal with at that time of year. Between the second and fourth quarters of 2021, free cash flows were negative. During the first quarter of 2022, Stargaze increased its subscription price from $33 to $34, and judging by the subsequent positive cash flows, the price increase seems to have successfully fixed that area of Stargaze’s financial health. Overall, financial metrics remain stable, but the main red flag comes from issues with expenses keeping operating income lower than where it shold be (the industry average for EBITDA growth is 39%).
The next step of the project was to analyze customer-related metrics. After the Q1 2022 price increase, customer attrition and churn rates predictably skyrocketed, but so did the number of new users each quarter. As a result, it seems reasonable to conclude that the price increase acted unintentionally as a promotional tool, potentially attracting attention to Stargaze and its offerings. This increase of new users largely neutralized any damage that attrition rates were doing to Stargaze’s userbase metrics. Circling back to the price increase in the first quarter of 2022, those time periods yielded the least healthy financial metrics for the company, but judging by the stabilizing userbase numbers and churn rates, it is safe to say that any damaging effects done by the price increase have worn off by 2023.
The third step of the project was to calculate and interpret annual financial metrics, including predictions. While other metrics seem relatively stable, the annual free cash flows shine a light on why the price increase decision was made. In 2021, Stargaze had its only annual negative free cash flow, but the 2022 price increase has alleviated that issue. Combined with a growing userbase, this suggests that the price increase is a long-term fix with a short-term speed bump. Free cash flows are predicted to increase by over $100,000 in upcoming years, suggesting that the company’s financial future is healthy. The unhealthy part of the company’s finances comes from the EBITDA margins, revealing a lower operating income to revenue ratio than the industry average of 39%. As mentioned earlier, this suggests a large set of expenses of some kind, which remains consistent throughout this timeframe.
Conclusion
As a result of its overall financial health and growing userbase, I recommended that the New York Jobs CEO Council form a partnership with Stargaze. Its 2022 price increase was a long-term success, and its negative impacts subsided after approximately two quarters. Despite this, I also recommended looking into areas where Stargaze was underperforming. Why does operating income decrease for every quarter except the first quarters, but significantly more for the fourth quarters? What caused free cash flows from Q2 2021 - Q4 2021 to be negative? Could this happen again? What kind of expenses is stargaze dealing with that takes money away from its operating income each quarter? Moving forward, I recommended a positive yet cautious relationship between the New York Jobs CEO Council and Stargaze based on its generally positive financial performance.
View the presentation format here.