Financial Model...help

[kagein]

I'm on a internship and i've been building financial models for a few companies...my mentor has now asked me to forecast the results for these companies in the years 2007-2008

i would like to know if there are any specific things i should look at, rather than just relying on past trends to forecast future ones.

 

[Jack o'Clubs]

past trends are not a bad starting point.

For revenues look at company guidance - have they commented about the growth of the business for the coming year? Are sales dependent on a region which has seen a big currency move (ie it might make sense to depreciate $ sales for future years). Anything about the business and what it is selling that suggests previous years growth is likely to grow or contract?

For costs, what are the main inputs for the business? Raw materials prices have increased in many cases and you may want to build that in. What were operating profit margins last year and any reason why they would change materially?

From there the model should take over, assuming you've put the right tax rates in, etc.

Hope that helps...

 

[kagein]

Yeah that does help thanks....after doing that my estimates are above concensus, im looking at the their breakdown and they have revenue growth at 10% even though the company has an average historical growth of about 20% and from the companies statements they expect sales growth to grow in line with previous years....should i stick to my guns or wimp out and put lower estimates?

 

[Jack o'Clubs]

it depends. if you're so far beyond consensus that you've clearly done something wrong, then obviously you need to think again. Bear in mind consensus figures can be 'wrong' too, if they contain too many out of date forecasts that have not been updated since the company last reported. If you're in the right ball-park, but just high then stick to your guns if you can defend your thinking. After all, you'll never make money just following the crowd.

 

[kagein]

i think I'll stick to my guns. I was told that analysts sometimes forecast numbers that they think the company can beat in order to become their broker.True?

 

[Jack o'Clubs]

No, not really, it's rather more complicated than that, although an analyst is unlikely to win friends in the company or among his clients if he continually provides forecasts which are missed.

 

[kagein]

hmmm.........well i know i'm right...i guess the analysts who've done this for years and years must be wrong!!!! :cheesy:

 

[kagein]

I've got a request bit of a cheeky one....could you review my model tell me what you think, any changes that need to be made, things to add, anything like that basically

thanks

 

[Jack o'Clubs]

I haven't time to go through it in detail, and i don't know the company, but the structure seems fine.

a couple of questions: assuming you're using this for forecasting, it doesn't need to go back to 2001, and don't you need to forecast beyond 2008, assuming you want to drive a valuation from it? You wouldn't really take a fundamental valuation off a 2008 EPS forecast.

and - bearing in mind I don't iknow what the company does, or what you want the model for - it's a decent financial model but you need some more drivers so you can flex the variables, particularly at the revenue line. eg lets assume staffline do staff recruitment. I'd want to see 'number of staff placed x average revenue per staff placement' or whatever is most appropriate as a minimum so I could easily flex the assumptions, eg what happens if they maintain their fees, but numbers go down, etc. You can then do sensitivity analysis to different scenarios, You can't do that if you just model revenue as 20% more than last year's revenue.

Shouldn't the mentor at your internship be reviewing this for you?

 

[kagein]

He's super busy at the moment so i dont want to bother him much...
thanks for the tip about revenue...the devils in the detail, ive got a new appreciation of that saying, since taking this on.