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Subject 1. Income Statement Modeling: Revenue PDF Download
Analysts can use different approaches to forecasting revenue for an individual company.

  • Top-down approaches usually begin at the level of the overall economy. Forecasts can then be made at more narrowly defined levels to arrive at a revenue projection for the individual company.

    • In a growth relative to GDP growth approach to forecasting revenue, the analyst forecasts the growth rate of nominal GDP and industry and company growth relative to GDP growth.

    • In a market growth and market share approach to forecasting revenue, the analyst combines forecasts of growth in particular markets with forecasts of a company's market share in the individual markets.

  • The opposite of top-down forecasting is the bottom-up approach. It starts with a micro view of the business that is built up to estimate revenues. It allows an analyst to quickly see how minor changes in assumptions can affect revenues. It also requires an in-depth knowledge of a company's revenue drivers.

    Examples of bottom-up approaches:

    • Time series.
    • Return on capital.
    • Capacity-based measure.

  • Hybrid approaches include elements of top-down and bottom-up approaches.

Learning Outcome Statements

a. compare top-down, bottom-up, and hybrid approaches for developing inputs to equity valuation models;

b. compare "growth relative to GDP growth" and "market growth and market share" approaches to forecasting revenue;

CFA® 2023 Level I Curriculum, Volume 3, Module 22

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