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Fundamental Valuation: Analyzing Projections

1. Fundamental Valuation: Analyzing Projections

In this chapter, you will go through a comprehensive exercise that allows you to practice what you have learned in this course. First, we will review the key topics on how to analyze projections.

2. Analyzing Projections

Since projections are a critical component of discounted cash flow analysis, we must make sure that this key input is reliable. Otherwise, if we use unreliable projections, we will end up with unreliable results. Garbage-In, Garbage-Out. We discussed two general ways of analyzing projections. First, is the simplest. We can visually inspect the projections relative to the historical data. Sometimes, visually looking at the data may not yield conclusive results or that a statistical analysis may give you more comfort. In that case, we also discussed the regression analysis technique of analyzing the projections. Regardless of what we find in either of these analyses, we need to be comfortable that the trend is justified. For example, even if the projections are consistent with historical trends, we need to understand the business sufficiently to get comfortable that maintaining the trend is indeed a reasonable outcome. This second step of the analysis depends on the individual engagement.

3. Let's practice!

Now let's try some examples.