Financial Statement Forecasting in Equity Valuation

Building a financial statement forecast model and turning its output into a value: what to forecast, revenue, costs, working capital, capital investment and financing, and scenarios.

1. 1. Disaggregated models: why and how to build a forecast valuation modelA disaggregated model forecasts revenue, expenses, assets and financing separately, so cash flow growth is the result of those assumptions rather than one assumed growth rate, and the forecast cash flows feed a present value or a relative value estimate.Free14 min
2. 2. 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
3. 3. 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
4. 4. Expense models: regressions, itemized costs and margin assumptionsExpenses can be forecast from a regression of cost growth on revenue growth, from itemized economically significant costs, or from direct margin assumptions, and every margin assumption implies a cost growth rate that the narrative must justify.13 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. Asset and financing models: investment, financing needs and FCFEThe asset model sets how much the company must invest to support its revenue, and the financing model decides where the money comes from or goes to, which is what turns a forecast of profits into a forecast of FCFE.15 min
7. 7. Integrated cases: a regional revenue build and richer financing assumptionsA top-down revenue forecast by region multiplies market growth by share change and then units by revenue per unit; richer financing assumptions (a target debt ratio, interest on opening balances) change net income and FCFE but leave FCFF alone.16 min
8. 8. 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
9. 9. Matching the model to the company: life cycle, distress and controlHow a forecast model is built depends on the company: start-ups are valued on future sales potential, growth companies on future earnings, declining companies with an explicit probability of distress, and control changes as a scenario.14 min
10. 10. From forecast statements to equity value: FCFF, terminal value and scenariosA forecast model is turned into a value in six steps: forecast the income statement and balance sheet, derive FCFF, add a terminal value that fits the company's stage, discount, subtract debt, and repeat across probability-weighted scenarios.15 min
11. 11. Integrated case: from assumptions to equity value, step by stepA forecast model turns a short list of assumptions into statements, then into free cash flow, a terminal value and an equity value; reading forecast FCFF against history shows where the value comes from.18 min