Using Estimates In Models
- 03:10
Understand the benefits of using estimates instead of assumptions a three statement model.
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Transcript
To use estimates in models, we start with our assumptions. And on this screen about halfway down, we can see we have some Income Statement Assumptions. The first line underneath that, where it says Revenues (historical and consensus), that shows us that we've got three years of consensus estimates for revenue, 576.9, 618.9, and 664.7. I'd like to convert them into growth rates. That's what's gonna happen on my income statement. I'm gonna take last year's revenue and I will grow it. So to do this, to get my year one to three revenue growth, I'll calculate that from the consensus estimates. However, we've only got those consensus estimates for the next three projected years. So for year four, our modeler's own estimates are gonna be needed for year four and onwards. This gives us an interesting mix on our assumptions page. We've got some consensus estimates for the first three years, but then we have the modeler's assumptions from then on. So, years one to three, and year four onwards, are formatted differently to delineate between calculated figures, years one to three, and the modeler's assumptions, year four onwards. But what about using estimates in the model? Are there any impacts there? Well, potentially. Here, we've got an income statement extract, and we can see that we've got a column for the year one E, i.e. my estimated figures or projected figures. The revenue figure of 576.9, that's come from our estimates, so that's great. That figure's locked in and we're happy with that. But the next figure we've got is EBITDA, and that's also come from our consensus estimates. I really want to use that. They're great sources of information. I don't want to try and calculate it myself. But that leaves us with a gap, my operating costs excluding D&A, excluding depreciation and amortization. How do we calculate them? Well, if we've got our revenue and we've got our EBITDA, then we just need to fill that gap. And we'll do that by taking revenue less EBITDA. In short, we need to make sensible assumptions to fill in the blanks ourselves. Now, the EBIT figure has also come from consensus estimates, and the amortization, I feel fairly confident that I was able to come up with an assumption myself, that figure of amortization I'm happy with. But it still leaves me trying to work out the depreciation number. Again, we're just going to fill that gap. We're gonna plug the gap. My calculation here is EBITDA minus EBIT minus the amortization. The consensus assessments are often only available for three years. That means the analyst's own forecast will be required from year four onwards. So we may have this impact of having to fill the gaps on some of our financial statements, depending on how our model is built.