Finance

Wild−Subramanyam−Halsey: Financial Statement Analysis, Ninth Edition

9. Prospective Analysis

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© The McGraw−Hill Companies, 2007

CHAPTER

NINE

9

A LOOK BACK < The preceding chapter dealt with analysis of company returns— both profitability and return on invested capital. Emphasis was on rate of return measures, disaggregation of returns, and accounting analysis of income components. That return-based chapter complements later chapters that focus on risk, including liquidity and solvency. A LOOK AT THIS CHAPTER We study forecasting and pro forma analysis of financial statements in this chapter. We provide a detailed example of the forecasting process to project the income statement, the balance sheet, and the statement of cash flows. We describe the relevance of forecasting for security valuation and provide an example using forecasted financial statements to implement a valuation model. We discuss the concept of value drivers and their reversion to long-run equilibrium levels.

P R O S P E C T I V E A N A LY S I S

LEARNING OBJECTIVES Describe the importance of prospective analysis. Explain the process of projecting the income statement, the balance sheet, and the statement of cash flows. Discuss and illustrate the importance of sensitivity analysis. Describe the implementation of the projection process for valuation of equity securities. Discuss the concept of value drivers and their reversion to long-run equilibrium levels.

> A LOOK AHEAD Chapter 10 expands our analysis of a company to short-term liquidity, capital structure, and long-term solvency. We explain liquidity and describe analysis tools such as accounting-based ratios, turnover, and operating activity measures of liquidity. We also analyze capital structure and interpret its implications for company performance and solvency.

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Wild−Subramanyam−Halsey: Financial Statement Analysis, Ninth Edition

9. Prospective Analysis

Text

© The McGraw−Hill Companies, 2007...