module 4 simple analysis and parsimonious forecasting patrick noonan n.
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Module 4: Simple Analysis and Parsimonious Forecasting Patrick Noonan. Overview of the Forecasting Process. Must create a set of financial statements that focus on enterprise items that we expect to persist Being conservative can be harmful

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Module 4: Simple Analysis and Parsimonious Forecasting Patrick Noonan


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Presentation Transcript
overview of the forecasting process
Overview of the Forecasting Process
  • Must create a set of financial statements that focus on enterprise items that we expect to persist
  • Being conservative can be harmful
  • Financial statement forecasts are highly dependent on our revenue forecast
  • Focus on those effects that would alter investment or business decisions
  • There are economic and industry considerations that come into play
  • Goal: Demonstrate the process by which forecasting toward valuation can be done and the kinds of information and decisions involved
goal of analysis continued
Goal of Analysis (continued)
  • Gather information that is useful in forming expectations of future outcomes
  • Examine rate of return on capital invested in the enterprise activities (RNEA)
    • EPM – How much operating profit does the firm earn from each sales dollar?
    • EATO – How productive were the firm’s enterprise assets?
  • It is important to look over both time and across firms
  • How do we move from analyzing historical outcomes to future enterprise profitability and use of the assets?
disaggregating return on net enterprise assets
Disaggregating Return on Net Enterprise Assets

Enterprise profit margin and

Enterprise asset turnover

return on enterprise operations
Return on Enterprise Operations
  • RNEA fluctuates year over year due to changes in EPAT resulting from one-time items.
breaking apart the rnea
Breaking Apart the RNEA
  • EPM – Indicates the profit generated by each dollarof sales (profitability)
  • EATO – Indicates the sales generated by each dollarof NEA (efficiency)
steps for forecasting
Steps for Forecasting
  • Forecast revenues via forecasts of sales growth rates
  • Forecast EPAT via forecasts of EPM
  • Forecast NEA via forecasts of EATO

We are valuing the enterprise – Thus, we don’t forecast the firm’s financing activities.

Revenues are often the most critical forecast since they drive all else.

parsimonious revenues
Parsimonious - Revenues

Average: 56.62%

What do we assume? 28.31%

parsimonious epm from sales
Parsimonious – EPM (From Sales)

What do we assume? 10%

parsimonious eato
Parsimonious - EATO

What do we assume? 1.65

parsimonious assumptions
Parsimonious Assumptions
  • Sales growth rate: 28.31%
  • Enterprise profit margin (EPM): 10%
  • Enterprise asset turnover (EATO): 1.65
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Parsimonious Assumptions

  • Sales growth rate: 28.31%
  • Enterprise profit margin (EPM): 10%
  • Enterprise asset turnover (EATO): 1.65

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slide21

Parsimonious Assumptions

  • Sales growth rate: 28.31%
  • Enterprise profit margin (EPM): 10%
  • Enterprise asset turnover (EATO): 1.65

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Parsimonious Assumptions

  • Sales growth rate: 28.31%
  • Enterprise profit margin (EPM): 10%
  • Enterprise asset turnover (EATO): 1.65

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