How to forecast the sales of a high growth company
hello and I am new here,
I am a finance student, and currently researching on a high growth company.
It is a real estate company and it is quite young and not yet mature and stable so its growth is still high
but so far I'm lost in forecasting their sales growth
because for the past 3-years its sales has grown at an average of 75% higher than the economy and industry growth.
What forecasting models or tools can I use?
market sizing, capital utilization, and growth drivers. Use a margin of safety and honestly growth companies are a shoot in the dark to get right
It is possible to normalize your revenues using an Ordinary Least Squares method. This method will normalize the beginning and end points.
Example is for years 1996-2008
If the year 1996 is in cell B3 and actual revenues are in cell B5, the formula in B6 the, OLS line, would be =TREND($B5:$N5, $B$3:$N$3,B$3) drag across. Drag and drop this formula across the page and drop in N6 directly below the actual revenues for 2008. Now you can use the CAGR formula to find an OLS smoothed growth rate.
Alternatively: (This is the way I was taught in school)
Forecast revenues using their historical IRR as the growth rate.
One more idea would be to look through the 10-k and see what management is expecting the drivers of growth to be. I.E. Product inflation, asset turnover strategies, etc.
Anyways good luck, I hope that helped somewhat.
It depends on how in depth you're willing to get. Easiest would be OLS like noted above, which is just basic regression and assumes they'll continue to grow at the same rate indefinitely, 75% or whatever you said. This isn't realistic because of market saturation.
What a real research analyst would do is go through the 10K and figure out exactly where the growth is coming from. What is the potential market? How much of that market have they reached? It's usually a safe assumption that the first 10% of a market is easier to convert into a revenue base than the next 10% and so on.
But what if they are increasing their presence in various markets? For example let's say they have an established presence in Market A, and they are expanding into Market B. If Markets A and B have similar socioeconomic profiles, you could use the growth rates from their early years in Market A to project their growth in Market B, and do a sum of parts type analysis.
this reminds me of my attempt to analyze CRM early last year. The sell-side reports on their TAM was all over the place since CRM could expand to so many adjacent markets so the theoretical TAM was always growing. Still have no fucking idea, what a plausible TAM is.
Hello and thanks for all replies, all right I have sucessfully projected sales for the next five years
But my problem now is the negative free cash flows due to high capex and working capital changes added together it is 2x higher than both EBITDA and net income. Well it is only negative when I use FCFF when I use FCFE it is really low resulting in a really low intrinsic value. This is really a problem because I am required to give an intrinsic value not just the relative valuation.
Are there wrong in my forecasts? My capex are dependent to sales, then my inventory, A/P, A/R, I utilized Day sales inventory, Days payable outstanding, and Days sales outstanding. All other current assets such as held for trading inv. are % of Sales. Well that's about it there are no bloated accounts in my forecasts so far. What could be the problem?
Your skills are obviously beyond mine, but have you tried looking at the EVA spread?
/delete my post
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