2. • Financial statement analysis are undertaken with a forward
looking decision in mind.
• Managers need forecasts for planning and to provide
performance targets
• Analysts needs forecast to help communicate their views of the
firms prospects to investors, bankers and debt market
participants
3. SCOPE OF FINANCIAL FORECASTING
• Financial forecasting describes the process by which firm
think about and prepare for the future.
• Provides a means for the firm to express its goal and priorities
and to ensure that they are internally consistent
• Assists the firm in identifying the asset requirements and
needs for external financing
• Balance sheet and income statement are related to sales, so the
forecasting process can help the firm to asses the increase in
current and fixed assets that supports forecast sales level
5. • PERCENTAGE OF SALES METHOD
• It is a financial forecasting approach
• It is based on the premise that most balance sheet and income
statement varies with sales
• This method helps in forecasting financial statements and also
helps to construct the firms need for external financing
6. • The first step is to express the balance sheet and income
statement which vary directly with sales
• It is done by dividing the balance of these accounts for the
current year by sales revenue for the current year
• Fixed assets are often tied with closely to sales so it is assumed
that when fixed assets are in full capacity it will directly vary
with sales
• Change in retained earnings are also linked to sales, link
comes from the relationship between sales growth and
earnings
7. • Long term debts and common stock accounts do not vary
automatically with sales
• So changes in these accounts depends up on how the firm
chooses to raise the funds needed to support the forecast
growth of sales
8. • EQUITY VALUATION MODEL
• Valuation provides a mean for measuring the impact of
company’s policies and strategies on creating or destroying
share holders value
• Prior step in the decision to continue in the business, sell,
merge, grow or buy other companies
9. METHODS OF EQUITY VALUATION
• BALANCE SHEET BASED METHOD
• INCOME STATEMENT BASED METHOD
• DISCOUNTING BASED METHOD
10. BALANCE SHEET BASED METHOD
• Under this method , the companies values are estimating on
the basis of the value of the company's assets
• It considers that the company’s value lies basically in its
balance sheet
• this method measures the value from a static view point, so it
doesn’t take in to account the company’s possible future
performance
11. • Book value
• It is the value of shareholders equity stated in the balance sheet
in the form of capital and reserves
• This quantity is same as the differences between assets and
liabilities
• The major disadvantage is that the accounting information are
subject to the degree of subjectivity with the result that the
book value almost never matches the market value
12. • Liquidation value
• This is the value of company in the event of liquidation of the
company
• It is calculated by deducting the business’s liquidation
expenses from the adjusted net worth
13. Income statement based method
• It is based on the income statement seek to determine the
company’s value through the size of earnings and sales value
• Value of earnings
• Under this, the value of equity share net income is multiplied
with price earnings
• Equity value= P/E *net income
14. DISCOUNTING BASED METHOD
• This method seeks to determine the company’s value by
estimating the cash flows it will generate in the future and then
discounting them at a rate commensurate with the riskiness of
the firms future earnings potential
15. CREDIT VALUATION METRICS
• Debt metrics intended to evaluate the ease with which the
entity can service its liabilities and satisfy the covenants and
the extent to which the entity’s credit position has altered or is
likely to be altered
• A sustained recession may forced even the most creditworthy
entity to draw on available credits or issue debt and equity that
were not contemplated in order to satisfy their funding needs
16. • A tightening credit market and period of low liquidity in the
financial market will affect all entities regardless the current
financial strength, and this model is designed to capture those
possibilities
• In this event the cost of capital for almost all the firms will rise
• Thus the factor affecting the ability of an enterprise to raise
capital are also explored
17. • Extraordinary factors and events are not mentioned explicitly
under each metric, are always considered so as to ensure that
the result is a true representation of the credit health of the
entity and its ability to return cash through the free cash flows ,
to share holders.
