Chapter 6 Prospective Analysis: Forecasting Flashcards
Who needs forecasts?
- ______need to forecasts to formulate business plans and provide performance targets
- ____________ need forecasts to help communicate their views of the firm’s prospects to investors
- _________ and debt market participants need forecasts to assess the likelihood of loan repayment
- Managers
- Analysts
- Bankers
Strategy, accounting, and financial performance analyses provide valuable information that help to shape _____ assumptions.
(For example, for breakthrough technologies, business alliances, and business line expansions.)
forecast
Forecasts of future performance should be ______, including important financial statement items
(a comprehensive approach is useful because it guards against unrealistic implicit assumptions)
comprehensive
True or false?
An analyst forecasts growth in sales and earnings for several years without explicitly considering the required increases in working capital and plan assets and the associated financing, the forecast might possibly imbed REASONABLE assumptions about asset turnover, leverage, or equity capital infusions
FALSE
For example, if an analyst forecasts growth in sales and earnings for several years without explicitly considering the required increases in working capital and plan assets and the associated financing, the forecast might possibly imbed UNREASONABLE assumptions about asset turnover, leverage, or equity capital infusions
The most practical approach is to focus on projecting _________financial statements rather than to project detailed line items
CONDENSED
A condensed income statement includes:
- ____ (the #1 driver!!!!!!)
- Net operating profits after tax _____
- Net _____ ______ after tax
- Taxes
- Net income
- SALES
- NOPAT
- interest expense
- Taxes
- Net income
A condensed balance sheet consists of:
- •Net operating ____ _____
- Net long-term _______
- Net ____
- ____
- working capital
- assets
- debt
- equity
Typically, estimating future _______ is the critical first step in arriving at forecasted financial statement information.
SALES
On a condensed Balance Sheet, the
Net operating ________ = Net ______
Net operating assets = Net capital
- _____performance may be used to understand the behavior of key measure such as sales or earnings
- Studying ____ time series of measures such as earnings can provide insights into trends for future performance
- Measures from ____ periods provide benchmarks to compare forecasts against
- Past
- past
- prior
Sales growth tends to be ______-________ (coverge toward the mean)
(graph show a converging pattern, because high achievers will likely slow down, and low achievers will likely catch up)
mean-reverting
Sales growth rates tend to be “mean-reverting”: firms with above-average or below-average rates of sales growth tend to revert over time to a “normal” level (historically ___% to ___% for US firms) within ___ to _____ years
7-9%
three to ten years
TRUE OR FALSE
Even when a firm is growing rapidly at present, it is generally unrealistic to assume that the current high growth will persist indefinitely.
TRUE
As industries and companies mature, their growth rate slows down due to demand _____ and intra-industry ________
SATURATION
COMPETITION
ROE is also ____-_____
mean-reverting
ROE behavior is dependent on both ____ and the ____ base.
equity
asset
ROE = Operating _____
ROA
REFERENCING ROE COMPONENT IN GRAPHS
Profit margins and ROEs tend to be driven by ______ to normal levels over time
competition
REFERENCING GRAPHS FOR ROE COMPONENTS
In contrast to rates of return and margins, it is reasonable to assume that asset turnover, financial leverage, and net interest rate remain relatively stable over time (unless there is an explicit change in _______ or ________ policy being contemplated for future periods)
TECHNOLOGY
FINANCIAL
___________conditions should also be considered when making forecasts (e.g., consumer confidence, interest rates, oil price, inflation, etc.)
MACROECONOMIC
__________ conditions are difficult to predict in the short term, and thus it is advisable to assume the effect will even out in the long term.
MACROECONOMIC
FORECASTING CONSIDERATIONS
- use “_______ behavior” as the baseline; graphs on slides
- incorporate “other ________”
- “________” forecastS
PERFORMANCE
CONSIDERATIONS
DEVELOP
The _______ forecast is the most crucial estimate in the forecasting process because other income statement and balance sheet accounts derive, either directly or indirectly, from the sales forecast.
SALES
Formula for sales forecasts:
_______growth rate = (Sales – Prior Year’s Sales)/Prior Year’s Sales
________ revenues = Actual revenues * (1+Sales growth rate in %)
sales
forecasted
When a firm has multiple segments, make separate sales growth forecasts for each segment and then take a ______average growth rate
(89% of sales come from the US/Canadian segments, while only 11% comes from the European market)
weighted
•Competitive pressures will lead to a steady decline in _____ margins over time
NOPAT
What are primary drivers of operating working capital?
- Day’s accounts _______
- _______turnover
- Day’s accounts ________
RECIEVABLE
INVENTORY
PAYABLE
Developing a Long-Term Assets to Sales Forecast
Net long-term assets typically consist of Plant, Property, and Equipment (______) and intangible assets
PPE
Developing a Capital Structure Forecast
A company’s capital structure would typically be expected to remain constant, simply because management policies on capital structure are _______ to change
SLOW
Seasonality and Interim forecasts, aka _____ forecasts, are always based the quarter from the same quarter of the previous year.
(Always base the quarter from the same quarter of the previous year, to take into account seasonality)
quarterly
- An asset write-down – will ________ affect future income (damage to building bec. Of hurricane, it causes money to rebuild and production will be negatively affected; inventory is another example as well, like an older model of an iphone that is no longer in demand); these are typically physical assets
- A merger or acquisition It depends…it will be ______if the companies have synergies; but if the companies are not related or all, this will affect forecasts _______.
- The sale of a major division if the division is losing money, it will be ______ forecast; and visa versa
- The initiation of dividend payments; forecasts will be ______; this is not an expense, it only reduces retained earnings; sends a good message to capital participants that it has a lot of free cash flow; financially healthy companies initiate a dividend payment
1, negatively
- positive; negatively
- positive
- positive
(CONCLUDING SLIDE)
- _______ is the first step in prospective analysis of firm performance.
- Preliminary business strategy, accounting, and financial analysis should form the basis for many assumptions used in _______.
- ________should be comprehensive and include key elements of the financial statements.
- When forecasting, the _____ series behavior of various statistics should be kept in mind.
- FORECASTING
- FORECASTING
- FORECASTS
- TIME
