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Top-Down Analysis is a technique that starts from looking at the big picture and identifies what is important, with information being drawn only from the most significant data points.  An analyst conducting top-down analysis uses this approach to identify needs for customers or trends in the market. It is widely used by businesses because it helps them prioritize their work without having to research all possible options.

A top-down analysis approach assumes that global (or macroeconomic) trends provide the most important external direction for a firm. The key to making an effective top-down strategy is for this region to be selected or predicted with precision, and the company’s response plan tailored accordingly. Top-down approaches are used in strategic management for identifying key trends and developing competitive strategies (SWOT analysis).

Top-Down analysis in Financial Strategy

Top-Down analysis is a powerful tool for the development and implementation of strategic financial initiatives. It is an analytical perspective that examines the company as a whole and its interdependent relationships with customers, competitors, suppliers, technology partners and other stakeholders.

One can use top-down analysis to identify industry dynamics such as competition, disruptive innovations and market trends before any particular company begins to actively compete in this area. A business strategy can be developed by understanding how it will compete within its broader industry and then designing tactics that fit into these strategic goals.

How to Conduct a Top-Down Analysis

Most people tend to approach the process of conducting a top-down analysis from a bottom-up perspective. In other words, they start with analyzing the firm’s financials and forecast its future profits, then project these figures backwards in time using various valuation models. However, this decision is based on a fundamental misunderstanding of how a top-down approach works.

In contrast to bottom-up analysis, top-down analysis starts with high level assumptions about the macroeconomy and then analyzes what happens in individual firms within that economy. In top-down analysis, we assume beforehand that the world is growing and the economy is expanding. It is followed by an analysis of existing industry structure and determining what would be the industry composition in 50 years under optimistic and pessimistic assumptions about economic growth and productivity. We construct a scenario portfolio of stocks by combining both assumptions: T = topline or E = bottomline. The “bottomline” scenario assumes pessimistic growth assumption while the “topline” scenario assumes optimistic growth assumption. This is usually done using Market-cap weighting methodology.

Using this approach, analysts need to make only one assumption (macroeconomic scenario) in order to create their model portfolio.
For example, emerging markets are growing faster than developed markets and fast growth means low profitability for new companies in the industry. This means that investors should expect low returns on equity in the long run in these markets. Thus, active management results are not rewarded because of the high level of competition and profit margins are low. Therefore, emerging markets will have a smaller weight in the Top-Down model portfolio than developed countries because higher returns on equity are expected there.
We can also assume that it is more beneficial for companies to expand into new markets. Therefore, the Top-Down model will overweight emerging markets in their investment decisions.
There are many other assumptions that can be used in top-down analysis. For example, the assumption that price-to-earnings ratio is a good metric for determining value of a stock has been questioned by some academic papers, but I believe it is still useful for investors to make this assumption in order to simplify the process of conducting this kind of analysis. Another example is the assumption that industries with higher returns on equity will outperform industries with lower returns on equity in the long run.

This type of analysis gives us a view of how an industry will look like in the future and a view on financial results of companies within that industry. However, it is important to understand that financial results depend on how well or how badly a firm can do with its resources. The more resources a firm has, the more profits it can make. We assume that there are no costs associated with acquiring new resources. In other words, we assume infinite resources for every company within the Top-Down model portfolio.

In reality, firms use limited resources to extract more value from their assets and generate new output from those assets. When using this approach, analysts must stress this fact to investors as an additional assumption in their analysis.

Perhaps the most important part of a Top-Down analysis that makes it an important management tool is that it can determine future financial returns on equity of companies within an industry. The analysis starts from a very basic assumption – world economy will grow, and it is possible to make good guesses about sectors that will grow faster than others. In addition, analysts can adjust for other factors such as technology, quality of management teams, etc.

Hire the best Top-Down analysis specialists in 2,900+ industries

Fintalent is the invite-only community for top-tier M&A consultants and Strategy talent. Hire global Top-Down analysis consultants with extensive experience in over 2,900 industries. Our platform allows you to build your team of independent Top-Down analysis specialists in 48 hours. Welcome to the future of Mergers & Acquisitions!

Why hire top Top-Down analysis experts?

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Frequently asked questions

Most frequent questions and answers

What clients usually engage your Top-Down analysis Consultants?

We work with clients from all over the world. Our clients range from enterprise and corporate clients to companies that are backed by Private Equity or Venture Capital funds. Furthermore, we work directly with Family Offices, Private Equity firms, and Asset Managers. Most of our enterprise clients have dedicated Corporate Development, M&A, and Strategy divisions which are utilizing our pool of Top-Down analysis talent to add on-demand and flexible resources, expertise, or staff to their in-house team.

How is Fintalent different?

Fintalent is not a staffing agency. We are a community of best-in-class Top-Down analysis professionals, highly specialized within their domains. We have streamlined the process of engaging the best Top-Down analysis talent and are able to provide clients with Top-Down analysis professionals within 48 hours of first engaging them. We believe that our platform provides more value for Corporates, Ventures, Private Equity and Venture Capital firms, and Family Offices.

Our Hiring Process – What do ‘Community-Approach’ and ‘Invite-to-Apply’ mean?

‘Invite-to-Apply’ is the process by which we shortlist candidates for the majority of projects on our platform. Often, due to the confidential nature of our clients’ projects, we do not release projects to our whole platform but using the matching technology and expertise of our internal team we select candidates who are the best fit for our clients’ needs. This approach also ensures engagement with our community of professionals on the Fintalent platform, and is a benefit both to our clients and independent professionals, as our freelancers have direct access to the roles best suited to their skills and are more likely to take an interest in a project if they have been sought out directly. In addition, if a member of our community is unavailable for a project but knows someone whose skill set perfectly fits the brief, they are able to invite them to apply for the role, utilizing the personal networks of each talent on our platform.

Which skills and expertise do your Fintalents have?

The Fintalents are hand-picked and vetted Top-Down analysis professionals, speak over 55 languages, and have professional experience in all geographical markets. Our Top-Down analysis consultants’ experience ranges from 3+ years as analysts at top investment banks and Strategy consultancies, to later career C-level executives. The average working experience is 6.9 years and 80% of all Fintalents range from 3-12 years into their careers.

Our Top-Down analysis consultants have experience in leading firms as well as interfacing with clients and wider corporate structures and management. What makes our Top-Down analysis talent pool stand out is the fact that they have technical backgrounds in over 2,900 industries.

How does the screening and onboarding of your Top-Down analysis talent work?

Fintalent.io is an invite-only platform and we believe in the power of referrals and a closed-loop community. Members of our community are able to invite a small number of professionals onto the platform. In addition, our team actively scouts for the best talent who have experience in investment banking or have worked at a global top management consultancy. All of our community-referred talent and scouted talent are subject to a rigorous screening process. As such, over the last 18 months totaling more than 750 hours of onboarding calls, of which only 40% have received an invite-link after the call.

What happens if I am not satisfied with my Top-Down analysis consultant’s work?

During your initial engagement with a member of our Fintalent talent pool with no risk. If you are not satisfied with the quality of your hire for any reason then we are able to find a replacement at short notice. There is no minimum commitment per project, but generally projects last at least 5 days and can last 12+ months.

Interested in our invite-only community of tier-1 Top-Down analysis experts?

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