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.
