ENG ELC 220 Lecture Notes - Lecture 12: Ceteris Paribus, Financial Statement Analysis, Sensitivity Analysis

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Most of the time, it is useful to summarize the view developed in the financial statement analysis with an explicit forecast of a firm"s future performance and financial position. This can help managers, or can act as an in the form of an estimate of the firm"s value. Prospective analysis can serve forecasting and valuation, which explicitly summarizes the analyst"s forward-looking views. A comprehensive forecasting approach includes not only earnings forecasts, but also forecasts of cash flows and the balance sheet. As it includes all these items, it guards against unrealistic implicit assumptions. Most forecasts are usually linked to the behavior of a few key drivers, which is mostly revenue. Ceteris paribus, working capital accounts and investment, as well as most expenses, should track the growth in revenue closely. The most practical approach to forecasting financial statements is to focus on projecting condensed financial statements.

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