Forecasting Revenue Growth When Valuing a Company
Watch the video with Andrew Stotz on forecasting revenue growth when valuing a company or read a summary below.
- How does an analyst forecast sales growth?
- What if a company is in a cyclical industry?
- What if the company has very volatile sales growth?
- Is it wrong to forecast a steady growth rate for each of the future years?
Is a forecast of 9.6% unrealistic?
The problems:
- This is not a likely outcome
- The analyst may not have deeply modeled revenue
- Users of the forecast may lose confidence
Would this forecast be more acceptable?
The problems:
- How could the analyst accurately predict the swings in the sales growth?
- How confident would someone be with the analyst’s negative forecasts in 2026 and 2027?
Are these forecasts the same?
- This combines the prior two charts and you see that 9.6% is an average of all the points
- So is an average really that unrealistic?
- Does an average take into consideration the wide variety of outcomes?
What you have learned
- Yes, using an average revenue growth rate in a forecast seems unrealistic
- But it may appear less unrealistic than a wildly swinging forecast of each year’s revenue growth going out ten years
- Actually, an average incorporates those wild swings
- Therefore an average forecast is not as inaccurate as it may appear to some
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