LM 7: Company Analysis: Forecasting Flashcards
What are 4 common forecast objects, describe them? DISA
- drivers of financial statement lines (factors that have strong relationship with performance eg. sales, COGS)
- individual financial statement lines (less material line items like depreciation)
- summary measures (Forecasting a high-level summary measure (e.g., earnings per share)
- ad-hoc objects (items that have not yet appeared on a company’s historical financial statements eg. anticipated write offs)
What are the 4 forecasting approaches? HHMA
- Historical Results: Assume past is precedent
- Historical Base Rates and Convergence
- Management Guidance
- Analyst’s Discretionary Forecast
Describe Historical Results: Assume past is precedent.
Forecasts based on summaries of past performance (e.g., historical mean)
Describe Historical Base Rates and Convergence.
This approach is based on the assumption that a forecast object will converge to a base rate (e.g., peer group average) over a sufficiently long time horizon
Describe management guidance.
guidance provided by management on key metrics such as revenues and earnings on a macroeconomic level (or company level)
estimates are valued because they are forward-looking rather than backward-looking and assumed that managers have access to better information than outside analysts
What is normalized earnings?
company’s expected profit in equilibrium economic conditions with no impact from unusual or temporary factors such as mergers, restructurings, or changes in strategy.
Forecasts of company performance typically begins with a projection of?
top line revenue
What are 2 top down approaches to modeling revenue?
- growth relative to GDP growth
- market growth and market share
What does a top down approach begin with?
begins with analysis of overall economy
Describe the growth relative to GDP growth top down approaches to modeling revenue?
First, the analyst forecasts an expected growth rate for the overall economy in nominal terms. Then, a spread or multiple from that growth rate is applied to estimate a growth rate for an individual company.
eg. company’s revenue could be assumed to grow at a rate of 300 basis points above the nominal GDP growth rate.
Describe the market growth and market share top down approaches to modeling revenue?
Analysts begin by forecasting the growth rate in a particular market, such as an industry. Regression analysis can be used to determine if there is a predictable relationship between industry revenues and overall GDP growth. company’s revenues can then be estimated as the product of its current market share and expected industry-level sales.
What does a bottom up approach begin with?
begin within the individual company and then arrive at an aggregate amount based on estimates for each business segment, product line, or geographical source.
What are the 4 bottom up approaches to modeling revenue? VPCR
- volume and average sale price
- product line or segment revenues
- capacity based measures
- returns or yield based measures
Describe volume and average sale price bottom up approach.
projected revenues are calculated as the product of expected unit sales and the average price per unit
Describe product-line or segment revenues bottom up approach.
approach produces an overall revenue forecast by aggregating forecasts for individual products, business lines, or reporting segments.
Describe capacity based measures bottom up approach.
how much a company can potential earn with new stores opening or etc.
approach is often used to model revenues in the retail sector, using measures such as same-store sales growth combined with an assumed level of sales expected to be generated from each newly-opened store.
Describe returns or yield based measures bottom up approach.
revenue is estimated based on a company’s revenue-generating assets. For example, a bank’s revenues can be projected by applying an expected average yield on its loan portfolio.
What items must be taken out when forecasting earnings?
Non-recurring items
What 4 non-recurring items must be excluded from forecasting earnings? UERD
- unusual items
- extraordinary items
- restructuring items
- discontinued operations
What is gross profit formula?
sales - cogs = gross profit
What is EBITDA formula?
sales - cogs = gross profit
gross profit - SG&A = EBITDA
What does SG&A mean?
selling, general, and administrative costs
What are 3 working capital forecasts?
- days sales outstanding
- inventory days on hand
- days payable outstanding
What is days sales outstanding formula?
accounts receivable/ (sales/365)
average number of days it takes company to collect revenue once a sale has been made
What is inventory days on hand formula?
inventory / (COGS/ 365)
how many days it takes a business to sell through their stock of inventory.
What is days payable outstanding formula?
accounts payable / (COGS/365)
indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors
What are capital expenditures?
Capital expenditures are investments in long-term assets.
What are the 2 types of maintenance capital expenditures?
- maintenance capital expenditure
- growth capital expenditure
Whats the difference between maintenance and growth capital expenditures?
Maintenance capital: expenditures are necessary in order for the company to continue the operating at its current level
Growth capital expenditures are investments in assets and projects that allow a company to expand the size and/or scope of it operations.
What is scenario analysis?
models market conditions that put pressure on a portfolio
