Financial forecast

A financial forecast is an estimate of future financial outcomes for a company or project, usually applied in budgeting, capital budgeting and / or valuation; see Financial modeling #Accounting. Depending on context the term may also refer to listed company (quarterly) earnings guidance. For a country or economy, see Economic forecast.

Typically, using historical internal accounting and sales data, in addition to external industry data and economic indicators, a financial forecast will be the analyst's modeled prediction of company outcomes in financial terms over a given time period. (For fundamental analysis, analysts often also use stock market information, such as the 52-week high of stock prices to augment their analysis of stock prices.[1] ) For the components / steps of business modeling here, see the list for "Equity valuation" under Outline of finance #Discounted cash flow valuation.

Arguably, the key aspect of preparing a financial forecast is predicting revenue; future costs, fixed and variable, as well as capital, can then be estimated as a function of sales via "common-sized analysis" - where relationships are derived from historical financial ratios and other accounting relationships. At the same time, the resultant line items must talk to the business' operations:- in general, growth in revenue will require corresponding increases in working capital, fixed assets and associated financing; and in the long term, profitability (and other financial ratios) should tend to the industry average; see Valuation using discounted cash flows #Determine cash flow for each forecast period for more detailed discussion, and other considerations.

There is an extensive literature on the accuracy of analyst forecasts of revenue, profit and share price developments of companies. In general, this literature shows that analysts do not produce better forecasts than simple forecasting models [2][3]

References
  1. Low, R.K.Y.; Tan, E. (2016). "The Role of Analysts' Forecasts in the Momentum Effect" (PDF). International Review of Financial Analysis. 48: 67–84. doi:10.1016/j.irfa.2016.09.007.
  2. Hein Schreuder and Jan Klaassen (1984), Confidential Revenue and Profit Forecasts by Management and Financial Analysts: Evidence form The Netherlands, The Accoounting Review, vol. 59, no. 1, January 1984)
  3. Stotz, Andrew, An Empirical Study of Financial Analysts Earnings Forecast Accuracy (May 29, 2016). Available at SSRN: https://ssrn.com/abstract=2943146 or http://dx.doi.org/10.2139/ssrn.2943146
This article is issued from Wikipedia. The text is licensed under Creative Commons - Attribution - Sharealike. Additional terms may apply for the media files.