- Graphics

Speak for themselves

- Regression

Regressions quantify statistical relationships.

This slide, created using Excel (scatterplot with trend line), shows the relationship between sales growth and GDP growth.

The company is a cyclical company. An analyst might use regression analysis combined with a forecast for GDP growth as one input to forecast sales growth and earnings.

- Common Size Analysis

Common-size analysis: Express financial data, including entire financial statements, in relation to a single financial statement item or base.

Vertical common-size is in relation to a single financial statement item:

For balance sheet, divide each item on the balance sheet by the same period's total assets and express the results as percentages.

For income statement, divide each item on the income statement by total net revenues and express the results as percentages.

This analysis highlights composition and helps identify what items are important.

Horizontal common-size is in relation to same item in prior period:

Calculate percentage increase or decrease of each line item from the prior year.

Alternative presentation is to calculate each item relative to its value in a base year.

This analysis highlights items that have changed unexpectedly or have unexpectedly remained unchanged.

- Financial Ratio Analysis

Ratios express one number in relation to another.

Standardize financial data in terms of mathematical relationships expressed as percentages, times, or days.

Ratios can facilitate comparisons—trends and cross-sectional.

Ratios are interrelated.

For example, an inefficient firm (with low asset turnover, low receivables turnover, low inventory turnover) is likely to have poor profitability (low return on sales, low return on assets, low return on equity), leading to low market valuation (low price earnings ratios, etc.), leading to difficulty in selling equity leading to high leverage (high debt-to-equity, etc.), leading to high cost and risky funding (high funding costs in terms of higher interest expense and stricter credit policies from trade creditors), leading to poor profitability, and so on.

A ratio is an indicator of

- Activity

- Profitability

- Liquidity

- Solvency - Historical

A stable market and financial results that are changing slowly and predictably let you use historical data to forecast profitability. Your model extends past rates of change into the future. For example, if your profits have been growing at 5 percent per year for three years, you can predict they will be 5 percent higher next year. To check the performance of your model, you can track related variables such as revenue and expenditures. Extend their past rates of change into the future and calculate profitability by subtracting expenditures from revenue to see if the result matches your profitability forecast.

- Financial

If your finances are changing, you can't use a historical model. For example, if you have just taken out a loan to finance expansion or if a key material for your production is suddenly increasing in price, your profitability will change. In that case you can rely on financial calculations to forecast profitability. You can calculate interest charges or increasing material costs and add them to expenditures while projecting increasing revenue due to higher sales. Your calculations allow you to estimate profits and forecast company profitability.

- Trends

Sometimes you can observe trends, and you should take them into account for your profitability model. If you can isolate the effect of a trend, you can use another model as a base and add the trend effects to get an accurate forecast. For example, if a low cost competitor has been taking market share away from your company for two years but is going bankrupt and will cease operations in six months, you can start by using a historical model. You add the effect of declining market share over two years and the effect of increased market share due to the competitor's bankruptcy in six months. Your model accurately shows a steady decline and then a bump in sales

- Analytic

An analytic model is the least accurate, but it is the only one available for new product introductions or rapidly changing markets where relevant historical information or financial data doesn't exist. Analyze the business by using your knowledge of the market, experience from similar situations and cost estimates. You may have to hire experts with experience in the industry to get all the information you need. In the analytic model, calculate the expected costs of manufacturing and marketing the product, add overhead, estimate sales and revenue and forecast your profitability from the results. 1st EditionAlan Krueger1,281 explanations

William A. McEachern958 explanations

8th EditionAlan J. Marcus, Alex Kane, Zvi Bodie655 explanations

1st EditionDavid Anderson, Margaret Ray569 explanations