An understanding of the issuer's business model and analysis of historical financial statements will allow the analyst to identify key drivers of revenues, profitability, cash flows, and financial position. A driver is a causative factor to change an output (e.g. revenue).

Revenue analysis can be done using a bottom-up or top-down approach.

Bottom-Up Revenue Analysis

A bottom-up approach breaks down revenues into drivers such as sales volumes and prices, by product line, segment, or geography. Common revenue drivers include unit sales, pricing, customer acquisition or retention rates, market share, new product launches, geographic expansion, or changes in customer behavior. Analysts gather historical data on each revenue driver and the corresponding revenue figures. Analyze the relationship between the drivers and revenue over time to understand how changes in the drivers impact sales performance.

This approach provides a detailed understanding of the factors that contribute to a company's revenue and allows for more granular forecasting.

Pricing Power

While a company can change its prices at will, its ability to do so successfully (i.e. not causing a loss of volume) and relative to costs is driven by the company's pricing power. Pricing power refers to a company's ability to set and maintain prices for its products or services, independent of competitive pressures, while still capturing value from customers. To evaluate a company's pricing power, an analyst should ask questions like these:

• What is the industry structure?
• What is the level of product differentiation?
• What is the company's market position?
• How elastic is the product demand?
• What is the cost structure and profit margin?
• How much is the customer switching cost?

Top-Down Revenue Analysis

Top-down revenue analysis is an approach that involves analyzing macroeconomic factors and industry trends to estimate a company's future revenue. Instead of focusing on specific company-level drivers, the top-down approach starts with a broader view of the market and then narrows down to estimate a company's revenue based on industry growth rates, market share, or other relevant factors.

Analysts start by analyzing the overall macroeconomic environment, including factors such as GDP growth, interest rates, inflation, employment levels, consumer sentiment, and government policies. These macroeconomic factors can influence consumer spending, business investment, and overall industry performance. The second step is industry analysis - assess the industry dynamics and trends that can impact the company's revenue. Next is market sizing - estimate the size of the market in which the company operates. Then it is company's market share analysis and revenue estimation.

The top-down approach should be complemented with company-specific analysis and a bottom-up approach that considers the company's unique drivers, competitive advantages, and internal factors that may impact its revenue.