Methodologies for Estimating Future Profitability, Growth, and Valuation (Portfolio 5131)
This Portfolio analyzes popular methods used to determine a company’s value and predict its profitability. Estimates of profitability drive a company’s valuation as reflected in the stock price.
BNA Tax and Accounting Portfolio 5131, Methodologies for Estimating Future Profitability, Growth, and Valuation (Accounting Policy and Practice Series), analyzes the methods used to predict a company’s profitability, which is a fundamental goal of financial statement analysis. Estimates of profitability drive a company’s valuation as reflected in the stock price. Substantial academic research has been conducted on methods of improving the estimates of a company’s value and the forecasts of its profitability and growth.
This Portfolio explains how to use information in financial statements to evaluate a company’s performance. The goal is to provide insights into predicting future profitability and growth under alternative valuation methods as developed and refined by academic research. The Portfolio also discusses potential inefficiencies in the stock market that may be exploited through financial statement analysis.
The Portfolio explains, compares and illustrates various methods of valuing companies. including the dividend discount model, the free cash flow model and the residual income model. The Portfolio also discusses methods of forecasting sales and explains the benefits of analyzing various ratios including profitability ratios and risk ratios. The usefulness of industry benchmarks for forecasting is also discussed.
The Portfolio stresses the importance of analyzing a company’s operating activities. It explains how a company’s balance sheet and income statement can be disaggregated into operating activities and financial activities.
Section XIII, Section XIV, and Section XV discuss quality of earnings. The Portfolio identifies potential incentives for earnings management and suggests warning signals. Finally, the Portfolio discusses some fundamental market anomalies that may affect future financial statements before they affect the price of a company’s stock.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5131, Yohn, Methodologies for Estimating Future Profitability, Growth, and Valuation (Accounting Policy and Practice Series). Within the Accounting Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.
This Portfolio should be cited as Bloomberg Tax Portfolio 5503-3rd, Wang, Managing Legal Risk in the Financial Reporting Process (Accounting Policy and Practice Series). Within the Accounting Policy and Practice Series, however, references to the Portfolios will include only the Portfolio numbers and titles.
Table of Contents
I. Purposes and Scope of Portfolio
II. Review of Basic Financial Statements
III. Valuation Methods
IV. Forecasting and Valuation
V. Components of the Income Statement
VI. Ratio Analysis
VII. Disaggregating ROE Into Operating and Financing Activities
VIII. Forecasting Framework
IX. Forecasting Sales
X. Predicting Future Profitability
XI. The Behavior of Ratios Over Time
XII. Using Industry Benchmarks
XIII. Indicators of Potential Earnings Quality Issues
XIV. Potential Incentives for Earnings Management
XV. Signals of Potential Earnings Management
XVI. Market Anomalies
Associate Professor of Accounting, Kelley School of Business