Information Collection

Question 1

Why is forecasting essential in valuation?

Answer 1

Because valuation depends on future ROE, equity growth (g), and cost of equity (r), which must be forecasted.

Question 2

What are the three high-level value drivers?

Answer 2

ROE, g (growth in book equity), and r (cost of equity)

Question 3

What does a forecast of ROE represent conceptually?

Answer 3

The firm’s ability to generate value from equity in future periods.

Question 4

Why can’t you just plug in historical ROE into valuation?

Answer 4

Because past ROE may not reflect future performance due to changing conditions or one-time items.

Question 5

What is the relationship between ROE and value creation?

Answer 5

A firm creates value when ROE > r and destroys value when ROE < r.

Question 6

What is Level 1 in the FSAV forecasting framework?

Answer 6

High-level value drivers: ROE, g, r.

Question 7

What is Level 2 in the forecasting framework?

Answer 7

Operational inputs: sales growth, margins, R&D, CapEx etc.

Question 8

What is Level 3 in the forecasting framework?

Answer 8

Underlying business drivers like customer demand, technology, competition, and regulation.

Question 9

Why is Level 3 important for forecasting?

Answer 9

It explains the root causes behind operational performance and enables better predictions.

Question 10

Why does FSAV emphasize separating levels in forecasting?

Answer 10

To connect strategic understanding with financial modeling logically and accurately.

Question 11

What happens if you skip Level 2 and 3?

Answer 11

You risk producing unrealistic or unsubstantiated forecasts based on raw guesses.

Question 12

What are examples of firm-initiated information sources?

Answer 12

10-K, 10-Q, earnings calls, guidance, investor presentations.

Question 13

What are risks of using only firm-initiated information?

Answer 13

Management has incentives to spin data and omit bad news.

Question 14

What are examples of external information sources?

Answer 14

Competitor filings, industry reports, macroeconomic data, regulation updates.

Question 15

What is “alternative data” in forecasting?

Answer 15

Non-traditional sources like social media, satellite imagery, web traffic, or credit card data.

Question 16

Why is alternative data valuable?

Answer 16

It can reveal early trends or consumer behavior before it appears in financials.

Question 17

What’s the main risk of relying on alternative data?

Answer 17

It can be noisy, misleading, or misinterpreted without context.

Question 18

Why is triangulation important in information collection?

Answer 18

To verify trends using multiple independent sources, reducing bias and error.

Question 19

What is the “numbers vs. narrative” challenge?

Answer 19

It refers to the gap between what numbers show and the story management or media spins around them.

Question 20

Why are managers considered biased information providers?

Answer 20

They are incentivized to make performance appear better to boost stock price or compensation.

Question 21

What is earnings guidance?

Answer 21

Forward-looking estimates issued by management regarding expected performance.

Question 22

Why is earnings guidance a double-edged sword?

Answer 22

It provides insight but can be used to manage expectations and distract from underlying issues.

Question 23

What are examples of internal red flags?

Answer 23

Sudden receivables growth, frequent adjustments, margin spikes, negative cash conversion.

Question 24

What are external red flags to consider?

Answer 24

Legal issues, regulatory changes, market disruption, competitor warnings.

Question 25

What is off-balance-sheet financing?

Answer 25

Obligations not directly recorded as liabilities, often used to hide risk or debt.

Question 26

What's the danger of relying on pro-forma or adjusted earnings?

Answer 26

They can exclude real economic costs and mislead about actual profitability.

Question 27

How should analysts handle adjusted metrics?

Answer 27

Always reconcile with GAAP results and assess whether exclusions are reasonable.

Question 28

What is analyst workflow for forecasting a firm like Meta?

Answer 28

Analyze revenue drivers, margin trends, external risks, then build scenarios and valuation.

Question 29

What are the three standard forecast scenarios?

Answer 29

Base case (expected), bull case (optimistic), bear case (pessimistic)

Question 30

Why use scenario analysis?

Answer 30

To capture uncertainty and understand sensitivity to key assumptions.

Question 31

What's a common forecasting mistake?

Answer 31

Blind extrapolation - assuming past trends will automatically continue.

Question 32

Why is copying analyst consensus risky?

Answer 32

Consensus may be outdated, manipulated, or based on flawed assumptions.

Question 33

What is the role of judgment in forecasting?

Answer 33

Human insight is essential to interpret data, adjust for context, and build credible narratives.

Question 34

Why is forecasting not done in Excel alone?

Answer 34

Excel is a tool - forecasting depends on business understanding and high-quality assumptions.

Question 35

What's the difference between a forecast and a projection?

Answer 35

A forecast includes judgment and realism; a projection is mechanical and often assumption-heavy.

Question 36

Why is ROE not a forecasting input?

Answer 36

It's an output - it results from forecasting revenue, costs, assets, and equity.

Question 37

Why must you understand a business's strategy before forecasting?

Answer 37

Strategy determines future margins, reinvestment needs, and growth capacity.

Question 38

How can management timing manipulate investor perception?

Answer 38

By releasing good news during earnings, hiding bad news in footnotes, or delaying disclosures.

Question 39

What's the ultimate goal of forecasting in valuation?

Answer 39

To produce well-reasoned expectations of future performance that drive intrinsic value estimates.