Financial Reporting and Analysis IV
Reading 30. Financial Statement Analysis: Applications
Learning Outcome Statements
b. forecast a company's future net income and cash flow;
CFA Curriculum, 2020, Volume 3
Why should I choose AnalystNotes?
Simply put: AnalystNotes offers the best value and the best product available to help you pass your exams.
Subject 2. Projecting Future Financial Performance
By projecting profit margins and expenses, and the level of investment in working capital and fixed capital needed to support projected sales, the analyst can forecast net income and cash flow. When projecting profit margins:
- For relatively mature companies operating in non-volatile product markets, historical information on operating profit margins can be used to estimate future operating profits. Non-recurring items should be removed from computations.
- For a new company, or a company in a volatile market or a capital intensive industry, historical operating profit margins are usually less reliable in projecting future margins.
Sensitivity analysis is often used to assess the impact of different assumptions on income and cash flow. These assumptions include sales forecasts, working capital requirements, profit margins, etc.