Book 3_Equity_READING 47_COMPANY ANALYSIS_FORECASTING Flashcards
Key forecast objects include the following:
- Drivers of financial statement lines
- Individual financial statement lines
- Summary measures
- Ad hoc objects
The following forecast approaches (usually combined) are used for objects:
- Historical results
- Historical base rate and convergence: company’s growth rate, will converge to an industry average or median growth rate
- Management guidance
- Analyst discretionary forecast
The forecast horizon depends on
factors such as the portfolio strategy for the security, whether the industry is cyclical and company-specific factors
Top-down analysis
models a company’s sales as a function of economic growth or as a function of market growth and the company’s market share.
Bottom-up analysis
starts with an individual company or its reportable segments.
Examples of bottom-up drivers include the following:
- Average selling prices and volumes
- Product-line or segment revenues
- Capacity-based measures
- Return- or yield-based measures
Nonrecurring items
should be analyzed on a stand-alone basis
COGS and gross margin
are usually estimated as a percentage of revenue.
The fixed cost component of SG&A expenses
is generally larger than its variable cost component and might be modeled using a fixed growth rate
Selling and distribution costs
may be more directly related to sales volumes.
In forecasting working capital, the following measures are relevant:
- Forecast accounts receivable = DSO/365 * forecast revenues
- Forecast inventory = DOH/365 * forecast COGS
- Forecast accounts payable = DPO/365 * forecast COGS
Forecasting capital expenditures
requires knowledge of the management’s future business and revenue growth strategies.
Forecasting the firm’s capital structure
may be based on analysis of leverage ratios, while considering any borrowing requirements caused by planned capital expenditures as well as management guidance about its target capital structure.
Scenario analysis
An analyst should perform scenario analysis with multiple alternative assumptions to examine the sensitivity of net income to changes in these assumptions. The result is to develop a range of estimates.
