Lecture 7
Prospective analysis
= summary of what we have learned in the previous steps( strategy, accounting and financial)
= reverse financial analysis: we will use knowledge about these relationships in order to predict the
future performance of the company, how will this have an impact on value of the business
2 stages prospective analysis
Forecasting
valuation
1. The textbook proposes a comprehensive forecasting approach.
What is the benefit of this method?
Comprehensive approach:
Earnings forecast
Forecast of cash flow
Forecast of balance sheet
Benefit: prevent that you make unrealistic assumptions.
2. What assumptions are needed to forecast condensed balance
sheets and income
statements?
Revenue growth rate
NOPAT margin
Operating working capital/revenue
Net non-current operating assets/revenue
Non-operating Investments/revenue
RNOI= NIPAT/NOI
effective interest rate ( after tax)
debt to capital
3. What is the relationship between strategy, accounting and
financial analysis on the
one hand, and prospective analysis on the other hand?
The 3 preceding analysis: strategy, accounting and financial can lead to informed decisions by an
analyst about expected performance
Prospective analysis is a reverse financial analysis
4. How do (a) revenue growth, (b) earnings, (c) return on equity
(ROE) and (d) the
components of ROE behave over time?
Revenue growth tends to mean-reverting: above-average or below-average rates of revenue
growth tend to revert over time to a normal level( = average of the industry/economy)
Prospective analysis
= summary of what we have learned in the previous steps( strategy, accounting and financial)
= reverse financial analysis: we will use knowledge about these relationships in order to predict the
future performance of the company, how will this have an impact on value of the business
2 stages prospective analysis
Forecasting
valuation
1. The textbook proposes a comprehensive forecasting approach.
What is the benefit of this method?
Comprehensive approach:
Earnings forecast
Forecast of cash flow
Forecast of balance sheet
Benefit: prevent that you make unrealistic assumptions.
2. What assumptions are needed to forecast condensed balance
sheets and income
statements?
Revenue growth rate
NOPAT margin
Operating working capital/revenue
Net non-current operating assets/revenue
Non-operating Investments/revenue
RNOI= NIPAT/NOI
effective interest rate ( after tax)
debt to capital
3. What is the relationship between strategy, accounting and
financial analysis on the
one hand, and prospective analysis on the other hand?
The 3 preceding analysis: strategy, accounting and financial can lead to informed decisions by an
analyst about expected performance
Prospective analysis is a reverse financial analysis
4. How do (a) revenue growth, (b) earnings, (c) return on equity
(ROE) and (d) the
components of ROE behave over time?
Revenue growth tends to mean-reverting: above-average or below-average rates of revenue
growth tend to revert over time to a normal level( = average of the industry/economy)
