Brief Modeling Question - Stub Periods
Trying to practice building basic operating models/DCFs in preparation for interviews. If you have a few years of historical financial information, along with a stub period for the current year, how would you structure the timing of your projections?
For example, if I had full year data for 2018, 2019, 2020, and then data for the first quarter of 2021, should my first projection be for the last 9 months of 2021, and then begin yearly projections with 2022? What would be the best way to incorporate the available stub period into the stub projection?
So in this case you should first convert to months, but adjust each month to be 30 days. One column per month. General best practice is to allocate to months by GDP. You need this to most accurately model net working capital.
Disagree w/ the above post since you don't actually have monthly data for 1Q21, so allocating WC and cash on a monthly basis is inherently going to be inaccurate since it's just a straight up guess (GDP not a proxy to break out cash and WC timing) and more importantly, there's no reason to do it. Additionally, if you're an M&A guy, you'll never be asked to model on a monthly basis (even in RX, we only do that on an LE when we have monthly data from the company) and probably not even on a quarterly basis.
Hypothetically, if this is a public company w/ research coverage, you would plug in Q1 actuals into a 3/31 LTM column, then have a 9 months ended column that is annual consensus Revenue / EBITDA, less 1Q actuals (can build individual line items based on historical margin, etc.).
Ideally, you would like to be able to pull 1Q20 information so that you can have a 3/31 LTM column. This is best way to incorporate the stub period. Your thinking is correct on projections beginning w/ 9 months ended period, then next projection period being annual 2022.
So historicals are the annuals that you have data for & 3/31 LTM. Projections are 9 months ended 12/31/21 (annual consensus, less 1q21), FY 2021, 2022-end of projection period on an annual basis.
How do you go from 3/31 LTM to FY 2021? Do you just apply your revenue growth assumption to the 3/31 LTM amount?
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