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Week 3: Equity Analysis III (Income statement forecasting (sales forecast,…
Week 3: Equity Analysis III
Financial Statements Forecasting
based on
strategy analysis
accounting and financial analysis
A practical framework for forecasting
Income statement forecast
Balance sheet forecast
Sales growth behavior: tend to be
mean- reverting
(reverting overtime back to normal level within 3 to 10 years)
Earnings behavior: on average, follow a random walk (or a random walk with drift)
ROE behavior
ROE's components behavior
Other forecasting considerations
business strategy analysis
accounting analysis
financial analysis
business cycle and forecasting
Forecast assumptions
Key forecasting assumptions
net operating working capital to sales ratio
net operating long-term assets to sales ratio
NOPAT margin
net debt to capital ratio
sales growth rate
after- tax cost of debt
dividend
Income statement forecasting
sales forecast
sales(n) = sales(n-1)*(1+ sales growth rate)
NOPAT
NOPAT = sales x NOPAT margin
net interest expense after tax
net working capital forecast
net long term assets
net operating assets
net debt
net income
Balance sheet forecasting
closing equity = net operating assets - net debt
equity issues = closing equity - opening equity - profit - dividend distribution
negative figure of equity issuance = stock repurchase
Cash flows statement forecasting
Sensitivity analysis
Downside case
Upside case