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Forecasting

The document outlines key forecasting concepts for financial statements, including forecast objects, approaches, and analysis methods. It distinguishes between top-down and bottom-up analysis, detailing specific drivers and relevant measures for estimating costs and working capital. Additionally, it emphasizes the importance of scenario analysis to assess the sensitivity of net income to varying assumptions.

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35 views2 pages

Forecasting

The document outlines key forecasting concepts for financial statements, including forecast objects, approaches, and analysis methods. It distinguishes between top-down and bottom-up analysis, detailing specific drivers and relevant measures for estimating costs and working capital. Additionally, it emphasizes the importance of scenario analysis to assess the sensitivity of net income to varying assumptions.

Uploaded by

20ee1058
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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KEY CONCEPTS

LOS 45.a
following:
Key forccast objects include the
lines
Drivers of financial statement
Individual financial statement lines
Summary measures
Ad hoc objects
The following forecast approaches (usually combined) are used for objects:
Historical results
Historical base rate and convergence
Management guidance
Analyst discretionary forecast
The forecast horizon depends on factors such as the portfolio strategy for the
security, whether the industry is cyclical and company-specific factors.
LOS 45.b
Top-down analysis models a company's sales as a function of economic growth or
as a function of market growth and the company's market share.
Bottom-up analysis starts with an individual company or its reportable segments.
Examples of bottom-up drivers include the following:
Average selling prices and volumes
Product-line or segment revenues
Capacity-based measures
Return- or yield-based measures
Nonrecurring items should be analyzed on a stand-alone basis.
LOS 45.c
COGS and gross margin are usually estimated as a percentage of revenue.
The fixed cost comnponent of SG&A expenses is generally larger than its variable
cost component and might be modeled using a fixed growth rate. Sellng a
istribution costs may be more directly related to sales volumes.
In forecasting working capital, the
following measures are relevant:
forecast accounts receivable = DSO x (forecast
revenues / 305)
forecast inventory = DOH × (forecast COGS /365)
forecast accounts payable = DPOx (forecast
COGS / 365)
LOS45.d Equ
HistoricalIdepreciation isis
CompanyAnaly
rnenditures for usually the starting point for
equires knowledge of
requires the Forecastingfuture forecast
capital expenditu i
resngto capital
sratcgies. management's grow the
business and revenue growthfirm
Rorecastingthe firm's capital
ratios, while considering any
structure may be based on analysis of
apenditures as well as borrowing requirements caused leverage
management guidance about itstarget capital
by planned capital
LOS 45.e structure.
Ananalyst.should perform scenario analysis with
oexamirethe sensitivity of net income to changes multiple
in alternative assumptions
s to develop a range of estimates. these assumptions. The result

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