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Financial Modeling Valuation Analyst (FMVA)®

Combining finance, communication and marketing

Investor Relations (IR) combines finance, communication, and marketing to effectively control the flow of information between a public company, its investors, and its stakeholders.

Investors play a major and vital role in the success and growth of a company. Because of that fact, its of the utmost importance for companies to maintain strong, transparent relationships with investors. This is where the investor relations department of a company comes into play.

This article is designed to help you better understand investor relations in the broad sense, as well as to break it down into more manageable and specific segments. Without further adieu, lets dive right in.

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The main goals of an investor relations professionals are:

To enable the company to achieve the optimum share price that reflects the

Over the years weve spent a lot of time thinking about and working on business valuation across a broad range of transactions. This valuation infographic

Representing the company to investors and representing investors to the company

Providing financial information to investors (retail and institutional) in a timely and accurate way

Providing nonfinancial data to support company valuations

Observing the rules of securities commissions and stock exchanges

Presenting investor feedback to company management and board

Building receptive capital markets for future financing at favorable terms

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As we noted above, investors are essential to a company. Pretty much any company youve ever heard of (and some that you havent) have investors to thank for not only getting on their feet but also for the continuation of their operational success. Thus, its important for businesses to communicate effectively and honestly with investors. To further that end, companies typically build and rely on an investor relations (IR) department. Depending on the size and scale of a business, as well as on the number of investors the business has, an IR department may be limited to one person or extend to a team of people. In a broad sense, the IR department keeps the lines of communication and information open between investors and the company.

But to truly understand the magnitude of an IR department and its importance within a company, we need to break down the different roles that individuals or teams within the department fulfill.

The top executives of a company namely the chief executive officer (CEO) and chief financial officer (CFO) have a vast number of tasks they have to juggle on a daily basis. To help handle some of these tasks, the IR department will often be the place where word from Wall Street comes in, and will also be the portal through which the company communicates back.

It might be easier to understand if you think of the IR as the face of a company in the capital markets. Of course, investors and shareholders as many people do view the CEO orCFOWhat Does a CFO DoWhat does a CFO do – the job of the CFO is to optimize a companys financial performance, including: reporting, liquidity, and return on investment. Withinas the face of the company, however, when you dissect the inner workings of the top publicly traded companies, an IR department is usually in the middle of it all.

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IR acts as a portal, a passage through which investors and company executives communicate, but lets break that down a bit more.

The first piece of IRs role in creating channels of communication is triage. Investors, analysts, and anyone else with a request or a demand for information from a company are usually funneled to the IR department, which functions as a sort of overall catchers mitt. Whatever the IR department itself is capable of handling, passing off, passing down, or assigning elsewhere, it will do without involving the higher ups. This triaging is important to avoid overloading executives, who have other important tasks to attend to, with every information request that arrives at the companys doorstep.

The second piece of the communication puzzle is translation. IR acts as a translator for the language that Wall Street speaks. What we mean by this is that IR conveys to a companys executives how the company is generally being viewed by Wall Street and its investors. IR works to relay what the investor community may see as assets and flaws, what they want to be changed, what they dont understand, and, bottom line, what will drive the value of shares based on current and predicted investor wants and needs.

The final piece is for the companys values, interests, positions, and answers to be translated back to the wizards at Wall Street in a language they understand, namely such things asprofit marginsNet Profit MarginNet profit margin is a formula used to calculate the percentage of profit a company produces from its total revenue. The profit margin ratio of each company differs by industry. Profit margin = Net income  ⁄  Total revenue x 100. Net income is calculated by deducting all company expenses from its total revenue which is, projected goals,Earnings Per Share (EPS)Proforma Earnings per Share (EPS)Proforma earnings per share (EPS) are calculated to adjust for the impact of mergers & acquisitions. Guide to calculate proforma earnings, example, formula, and dividends.

Everything weve mentioned so far concerns functionality, but on a fairly large scale. The difficulty in breaking down IR is the myriad minutiae surrounding the functionality of the department within a company. Were understating things when we say that IR departments serve a variety of functions and play a host of roles.

Where to Find US SEC Filings. Publicly traded companies in the US are required to submit filings to the Securities and Exchange Commission SEC via the EDGAR database that is a freely available to the public.

, or other relevant commission (depending on where the company is listed)

Because IR fulfills so many duties and functions in so many capacities, its essential that the department stay fully integrated with nearly every other department in the company, such as the legal and accounting departments, as well as with the entire executive management team.

If reading this article hasnt made the essential nature of IR clear, what were about to tell you should make things perfectly clear. In 2002, theSarbanes-Oxley Act, otherwise known as the Public Company Accounting Reform and Investor Protection Act, was passed, a regulation that drastically increased how much and how often publicly traded companies were required to report financial and trading information.

Since then, there continues to be a consistent and evolving push for companies to remain more transparent and honest with investors, making a strong and efficient IR department an absolute necessity.

Heres what we hope you take away from this article: investor relations departments function in many ways to maintain clear communication channels between companies and investors. By serving that function, they are an integral part of helping to move a company forward.

Ensure receptive capital markets for future financing at favorable terms

WACC is a firms Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. The WACC formula  is = (E/V x Re) + ((D/V x Rd)  x  (1-T)). This guide will provide an overview of what it is, why its used, how to calculate it, and also provides a downloadable WACC calculator

Build long-term credibility with the investment community

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This concludes CFIs guide to the role and importance of investor relations.  To continue learning and expanding your knowledge, please explore these additional resources:

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Advance your career in investment banking, private equity, FP&A, treasury, corporate development and other areas of corporate finance.

Get certified as a financial analyst with CFIsThe Financial Modeling & Valuation Analyst (FMVA)® accreditation is a global standard for financial analysts that covers finance, accounting, financial modeling, valuation, budgeting, forecasting, presentations, and strategy.

Financial Modeling Valuation Analyst (FMVA)®

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