What to Forecast?
Analysts may focus on different forecast objects related to issuers’ financial statements. Below are four common forecast objects.
- Drivers of financial statement lines, which were illustrated in the earlier module on company analysis.
- Individual financial statement lines.
- Summary measures such as free cash flow, earnings per share, and total assets.
- Ad hoc objects, which may not yet be reported on historical financial statements.
Focus on Objects That Are Regularly Disclosed
Information that is not disclosed regularly (such as the size of a market from a third-party consultancy’s report) is suitable for informing forecasts but can be problematic for direct use because forecasts cannot be confirmed in a timely manner.
Forcast Approaches
Historical Results: Assume Past is Precedent
Historical Base Rates and Convergence
Management guidance
Analyst’s discretionary forecast
Selecting a forecast horizon
