Flashcards in Stream II - Lecture 4 Deck (12):
Why is prospective analysis so important?
It is useful for forecasting and valuation
Why are forecasts so important?
- Managers need forecasts for planning and to provide performance targets
- Analysts need forecasts to help communicate their views of the firm's prospects to investors
- Bankers and debt market participants need forecasts to assess the probability of loan repayments
What are the two elements that driver patterns are determined by?
- The current level of the driver relative to its typical level of comparison
- The rate of reversion in the long run (the rate at which the driver returns to the mean (fade/persistence rate)
Why does sales growth revert to the mean?
New entrants to markets/exits from markets
How much more accurate are analyst forecasts than random walk forecasts?
22% on average
Why do firms with high ROE tend to experience earnings declines?
Because investors come in and make the denominator of ROE bigger
After decomposition what two components of ROE tend to be stable?
Asset turnover and leverage
What are some exogenous factors that may affect driver patterns?
- Government and trade statistics (for economy and industry forecasts)
- Forecasts of recession
-Shifts in industry wide demand for product
What is contrarian stock selection?
Selling stocks with high growth and profits and buying stocks with low growth and profits. This allows you to take advantage of reversions.
What factors do we consider when we make a sales forecast?
- Firm strategy
- Product Market
What is sensitivity analysis and why is it important?
This is examining how values change in response to possible scenarios. It is important because it can be used to evaluate business decisions.