Investment exercise questions

Hello guys,

I was given an exercise at school about a private company, and Im asked to calculate its estimated revenue and ebitda range. I only have its financial statements from 2021 and 2022. I don't know what I should do. Do you have any advice ?



If it's an exercise where you have some time, then you'll need to do more than stick in a growth figure and call it a day. You'll likely (and again, your post is far too little context to give a conmprehensive answer) need to model out the company and think about the key drivers. For example, if it's a restaurant, can you break down revenues into # sites and revenue / site. Then, growth would be driven by site expansion and LFL sales growth. Try to think about the drivers of growth and whether you have access to information which might help guide your answer (e.g. type into Google "pet food market growth forecast" and I'm sure you'll find a few hits for that).


Thank you for your answer ! 

The company in question sells splints, crutches, etc. They expect to launch new products in the coming months. 

I can breakdown the business into divisions and get revenue/division. 

I suppose the two main drivers would be new customers and new products launch.

From then I don't understand if I base my future growth on my past growth/division or on the expected growth rate of the market (knowing that so far the business has been doing better than its market) ?

How can I take into account the drivers and risks in my model ?

I am also asked for an ebitda range, how could I go about that ?


Most Helpful

Great, in that case, you should definitely be breaking down by division.

My instinct would be to grow each division by the forecast growth rate of the market, plus some surplus which begins at the historic surplus of company growth over market growth, and converges towards zero over time. For example, suppose the crutches market grew at a CAGR of 4% from 2018 - 2022, and your company's division grew at 7%. Suppose for simplicity that market growth is forecast at 3% from 2022 - 2026. Then I'd begin your company's crutches growth at 6% (=3% market forecast growth + 3% historic surplus), and bring the historic surplus gradually down over time (maybe this is as simple as reducing it by 25 / 50bps p.a.).

The reason for bringing your company's growth surplus down over time is that, if you didn't, your company would in theory grow to be larger than the market it operates in, which doesn't make sense.

The surplus growth we're baking in here (the 3%) should already capture new customers, new products, market share growth, etc., so we don't need to do this separately, else we'd be double-counting. There might be some growth levers to consider (e.g. if your company is entering the European market and previously had only been operating in the US), but I'm assuming that that's not the case.

Inside a company, a practitioner may well forecast specific product lines and customers one-by-one, but I presume you don't have the kind of information to be able to do this.

Finally, on revenue, you may be able to split growth by volume and by price / mix. If you don't have that kind of data to begin with, then it's difficult for you to do that.

As for EBITDA growth, I don't know how much information you have in your financial statements, but you should try to forecast by line item again. Conservatively, your COGS should stay broadly constant as a % of Sales. You could argue that they decrease slightly as your company grows through scale economies and procurement savings, but this is an aggressive assumption. Note that since you have multiple divisions you should be forecasting COGS by division if you have the information to do so.

Then you may have a number of other line items like SG&A, utilities, etc. For these fixed costs, you can probably grow them by inflation, perhaps with a slight uplift above that (a company can't 10x in size and realistically keep the same number of admin staff).

This should enable you to come up with a sensible idea of how EBITDA moves over time (we'd expect margins to improve as the company benefits from operating leverage over time; that said, your company has a few different divisions. If a lower gross margin division if growing at a faster rate than higher gross margin divisions, then the mix change might dilute EBITDA (and gross) margins over time).


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