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  • 1. PREDICTION OF CORPORATE EARNINGS ,GROWTH AND CREDIT VALUATION METRICS
  • 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
  • 4. TECHNIQUES OF FINANCIAL FORECASTING• PERCENTAGE OF SALES METHOD• EQUITY VALUATION MODELS
  • 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 companys 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.
  • 18. Thank you