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Topic 3 Forecasting Earnings.pptx

Topic 3 Forecasting Earnings.pptx - Forecasting Earnings...

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Forecasting Earnings: Firm and Industry Analysis Topic 3 Buying a stock is buying a business … know the business ...?
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CURRENT AND PAST FINANCIAL STATEMENTS (analysis of information, trends, comparisons, etc.) FORECASTING Valuation Framework Based on Financial Statement Data RISK ASSESSMENT (and Book Values) FORECAST OF CASH FLOWS DISCOUNTED CASH FLOWS VALUE OF FIRM DISCOUNTED RESIDUAL EARNINGS FORECASTS OF EARNINGS (and Book Values) CAPITALIZED PERMANENT EARNINGS Each of these steps constitute one of your workshops Adjusting for Accounting Methods
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Overview Knowing the Business and Drivers Forecast Financial Statements From Key Drivers and Using Ratios Time Series Forecasting Random Walk Theory Time Series Properties of Earnings Analysts’ Forecasts Forecast ROA Forecasting Earnings - approaches and guidelines
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Financial Statement Analysis: Lens on the Business Business Drivers Filter of Financial Statement Analysis Interpreted as ROA, OPM and ATO Drivers
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Knowing the Business and Business Drivers What is the business model? What drives the revenue and expense lines? Demand for product/service, price elasticity Potential for growth Technological change issues Position in industry? Economic, regulatory, political, social etc factors
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Forecasting Financial Statements Forecast all economic factors and the full set of Operating Income drivers Express forecasts in a set of pro- forma financial statements
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Example Company Ltd Balance Sheet December 31 Year 0 Year 0 Year -1 Assets $mil $mil Property Plant and Equipment (cost less depn) 74.42 69.90 Net Operating Assets (NOA) 74.42 69.90 Long Term Debt (NFO) Net Financial Obligations 7.70 7.00 Shareholders' Equity (CSE) 66.72 62.90 74.42 69.90
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Example Company Ltd Income Statement Year Ending December 31 Year 0 Year 0 $mil Sales 124.90 Cost of Goods Sold (including depn of 21.40) 114.60 Gross Profit 10.30 Other Operating Expenses 0.50 9.80 Interest Expense (10% x 7.00m) 0.70 Net Income 9.10
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Example Company Ltd Cash Flow Statement Year Ending December 31 Year 0 Year 0 $mil Cashflow from Operations Operating Income 9.80 Depreciation 21.40 31.20 Cashflow from Investing Investment in PPE (21.40 + 4.50) 25.92 Free Cashflow 5.28 Financing Flows Dividends Paid 5.28 New Debt Financing 0.00
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Information from current financial statements Example Company Pro Forma Operating Activities ____________________________________________________________________________________________________________ Year-1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Income Statement Sales 124.90 Operating expenses 115.10 Operating income 9.80 Financial income (expense) (.70) Net income 9.10 Balance Sheet Net operating assets 69.90 74.42 Net financial assets (7.00) (7.70) Common stockholders’ equity 62.90 66.72 Cash Flow Statement OI 9.80 NOA 4.52 Free cash flow (C-I) 5.28 Dividends 5.28 Debt financing 0.00 Free cash flow (D+F) 5.28 ____________________________________________________________________________________________________________
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Calculated from forecast #’s Example Company Pro Forma Operating Activities (1) Sales forecast to grow at 5% Profitability Margin Ratio (PM) Asset Turnover Ratio (ATO) (4) forecast as constant payout ratio of 40% ____________________________________________________________________________________________________________ Year-1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Income Statement Sales 124.90 Operating expenses 115.10 Operating income 9.80 Financial income (expense) (.70) Net income 9.10 Balance Sheet
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