• Basic Financial Modeling

    Forecasting Debt and Interest

    Debt The issuance and repayment of debt is a balancing act that takes into account the cash available to the company. Holding on to too much cash is detrimental to the company because of the opportunity cost while too little cash could result in a company being unable to pay off its debt obligations....

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    Forecasting Shares Outstanding

    Basic shares outstanding can be estimated by taking the previous year’s average shares and adding share issued and subtracting share repurchases. The shares issued and shares repurchased are not averaged because they already represent averages that will span the year. To calculate diluted shares outstanding, use the treasury method. What it means is that...

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    Forecasting Shareholders’ Equity

    The shareholder’s equity is affected by the net income (retained earnings) and any share transactions such as capital raises, option executions and share repurchases. Share Repurchases are driven off management guidance and the market conditions. Share repurchases can be represented on the balance sheet as a separate account in treasury stock or netted into...

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    Forecasting Other Balance Sheet Items

    To determine how the other balance sheet items are forecast you will need to dig deeper into the foot notes to see what the drivers are. Do not spend too much time here unless you have guidance from management. Simply make some reasonable assumptions and move on. Example: Cisco Other Balance Sheet Items Step...

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    Forecasting Plant, Property and Equipment

    This one can be a tricky one to forecast as companies combine depreciation with other accounts. It’s common for it not to show up on the income statement and can be combined with amortization and other non-cash expenses on the cash flow statement. Look in the footnotes for disclosures on what depreciation methods the...

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    Forecasting Working Capital

    Working capital consists of the current assets and liabilities that the company requires to operate on a daily basis. These accounts include: Accounts receivable Inventory Marketable securities Other current assets Accounts payable Accrued expenses Other current liabilities Unless there is a material change in a company’s operations, these accounts are maintained at a ratio...

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    Forecasting Expenses

    Cost of Goods Sold Cost of goods sold is estimated as a percentage of revenues. Look in the MD&A (Management Discussion and Analysis) for signs that management is consolidating operations, divesting unprofitable businesses or acquiring more technology. To build more detail in your model, think about the drivers of products and what you need...

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    Forecasting Revenue

    Top Down Approach A top down approach starts with a macro view of the industry and refines the inputs to estimate revenues. The inputs used are the size of the industry, the expected growth rate, the market share of the company and the expect growth rate of the company’s market share. The advantage of...

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    Enter Key Metrics and Drivers

    Key metrics and drivers serve two main purposes when modeling. Forecasting: In absence of other information, historical figures can be used to forecast. For example, using a three year average as a forecast may be appropriate for a company in a mature industry with stable growth rates. Sanity Checking: When forecasting, it’s always important...

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    Model Setup

    Gather the information Begin by gathering the files required for historical information. For this tutorial, we’ll be forecasting using 10-K’s (annual reports), but there will be times where using 10-Q’s (quarterly reports) will be appropriate. You’ll usually need about four years of data, so the most current 10-K and one from two years back...

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