Company Analysis: Forecasting

How an equity analyst decides what to forecast (drivers, line items, summary measures or ad hoc items), which approach to use (history, base rates and convergence, management guidance or discretion), how far ahead to look, and how to forecast revenue, operating costs, working capital, capital spending and capital structure, finishing with scenario analysis around the key risk factors.

1. 1. What to forecast: forecast objects and principlesBefore forecasting anything, choose the object: a driver, a single line, a summary measure or an ad hoc item, preferring objects the company discloses regularly and keeping the model only as detailed as accuracy requires.Free12 min
2. 2. Forecast approaches and the forecast horizonAny forecast object can be projected from historical results, from a base rate it converges to, from management guidance or from the analyst's own discretion, and the right choice depends on industry structure, cyclicality, the business model and the quality of information.14 min
3. 3. Forecasting revenue: top-down, bottom-up and non-recurring itemsRevenue is forecast from top-down drivers (growth relative to GDP, or market size × market share) or bottom-up drivers (volume × price, segments, capacity, yields), with non-recurring effects stripped out and the two views used to check each other.15 min
4. 4. Forecasting operating costs: COGS, SG&A and segment marginsOperating cost forecasts are usually built on aggregated objects (cost of sales as a % of sales, SG&A split into variable and fixed parts, or segment margins), but they must stay coherent with the revenue forecast, including its product mix.14 min
5. 5. Working capital, capital investments and capital structureWorking capital comes from efficiency ratios applied to the revenue and cost forecasts; fixed assets from maintenance and growth capex less depreciation; and debt from a leverage ratio such as debt to EBITDA applied to forecast EBITDA.15 min
6. 6. Integrated case: fixed assets class by class and a marketplace cost baseForecast each long-term asset class with its own driver and roll it forward from the opening balance, and forecast a marketplace's cost of revenue on the sales that carry the goods, not on total revenue or GMV.16 min
7. 7. Scenario analysis: risk factors, cost structure and sensitivityInstead of a single point forecast, the analyst builds scenarios around the key risk factors, carries each through revenue and a fixed/variable cost structure to EPS, and tests how sensitive the result is to the most uncertain assumptions.Video · 6 min15 min