Model and forecast earnings

Ratios analysis used in preparing pro forma financial statements:

  • Provide estimates of financial statement items for one or more future period
  • Based on certain ratios’s movement direction
    • Estimate next-period revenues based on recent COGS
    • Next period sales → operating profit margin → forecast operating profits

Possible changes for key financial variables: 

  • Sensitivity analysis
    • What if questions: 
      • Effect on net income? if sales increase by 3% rather than 5%
  • Scenario analysis
    • Based on specific scenarios
      • Specific outcomes for key variables
  • Simulation
    • Probability distribution for key variables are selected