Explain financial models?

Financial models, in essence, are summed up financial representations of a firm's future position computed by forecasting its financial numbers and are helpful in making decisions for institutional investors and other relate parties to buy or sell the target company. Financial Models are used for company valuations(equity research) and aim to accurately forecast earnings and hence future price of the company from an investor/ buyer's perspective. One can use various valuation techniques such as the DCF Model(predominant in investing and M&A activity), Relative Valuation and Levereged Buyout Models (for P.E. investors).

In equity research, financial models are used to forecast future position of the a particular company and then target price is identified based on different valuation techniques e.g FCFF, DDM, Relative Model. Based on target price decision to buy or sell is taken.