CH.6 PROSPECTIVE ANALYSIS: FORECASTING

The Techniques of Forecasting The Overall Structure of Forecasts Do it comprehensively Involve many forecasts Key “drivers”: sales, profit margin Focus on projecting “condensed” financial statements

The Techniques of Forecasting (Cont’d) Getting started: Points of Departure Last year performance, last year performance adjusted with recent trends, average performance over several prior years The behavior of sales growth: mean reverting The behavior of earnings: random walk The behavior of ROE: mean reverting The behavior of components of ROE Operating asset turnover, net financial leverage: stable NOPAT margin and spread: most variable

Making Forecasts Table 6-1: forecasting assumptions Table 6-2: forecasted income statements and balance sheet

Sensitivity Analysis Seasonality and Interim Forecasts Can not focus only on performance of the most recent quarter, but also the performance of the comparable quarter of the prior year