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Lecture 7: Prospective analysis (1) - Coggle Diagram
Lecture 7: Prospective analysis (1)
Make forecasts and value business
Forecasting overview
to implement
valuation analysis
forecasts of future performance should be
comprehensive
, including all
condensed financial statements
=> free of unrealistic assumptions
condensed BS
Shareholders' equity
Net debt
NLTA
Net OWC
condensed IS
Sales
NOPAT
NIEAT
Net income
Forecasting structure
time series behavior
earnings
ROE
Sales growth
key strategic drivers
Profit margin (NOPAT margin)
Asset turnovers and major expenses => often held constant
Sales
pay attention to possible
structural changes
helps to
avoid internal inconsistencies
and
unrealistic implicit assumptions
Condensed financial statements
OWC + NLTA = Net debt + Shareholders' equity
projecting
Assumptions: how we use the beginning balance sheet and run the firm's operations will lead to an
income statement
for the forecasting period (determine the
time horizon
)
Assumptions about investment in working capital and non- current assets, and how we finance these assets, results in a
balance sheet
at the end of the forecasting period
Start with
condensed financial statements
of most recently completed fiscal year
assumptions (
IS
)
first: sales
NOPAT margins
After- tax interest rate on beginning (net) debt
assumptions (BS)
OWC/ Sales (
short- term
assets turnover)
Operating non- current assets/ sales (
long- term
assets turnover)
Net debt/ capital
Example:
page 14
effective interest rate after tax = NIEAT/ Net debt
Behavior of ROE component parts
Most
variable components
of ROE
NOPAT margin
Spread
Tends to be
stable
Operating asset turnover
Net financial leverage
Performance behavior
Sales growth
mean reverting (7-9% in long- run)
ROE
mean reverting (10-12% on average for Australian listed firms)
Growth models (
p.21
)
K = investment of tangible assets
L = Labor
Long run equilibrium: Investment = Depreciation
Solow growth model
role of
innovation
A = innovation (new technologies)