Running head: FORECASTING

Unit 2 Assignment 2
Laura L. Church
Foundations in Finance
October 16, 2016
Walter Adams
Capella University

Running head: FORECASTING

Identify techniques for forecasting financial statements as discussed in the text, and explain
when they should be used.
Financial statements are only one of the tools that should be looked at when trying to
forecast the future of a company. Some of the ratios I would look at would be in Liquidity, how
much cash does the company have and why is it not investing it, making more money, or
expanding, or doing research for future endeavors? Asset management ratios, how well is the
company managing what it already has? How old is its inventory, Inventory Turnover ratio. Debt
management, how well does a company manage their debt, Total Debt to Total Capital Ratio or
TIE Ratio? Profitability Ratios, Operating Margin and Profit margin ratios will help decide how
much money the company is actually making. Lastly, Market Value ratios, these will tell us how
much money the shareholders actually make with the ROE, ROIC and the BEP. These ratios of
course are not an exact science. For example Inflation could distort current market values of
assets, some firms could use window dressing by making them seem better than they actually
are, or accounting practices could make the financial statement look better than it is by not
including leased equipment, which would give the company a higher profit ratio.
Other things to keep in mind when trying to forecast for the future of a company is the
Du Pont ratio as this takes some ratios and uses them together to attain information such as the
ROE and ROA. Actual production costs of the product being produced, is it priced correctly?
Then there is historical trend analysis, which would show how well the company has performed
through the years. We can also look at outside influences such as environment, location,
competition in the area, and the management.
Environment would tell us if the company was based in a could political state, with low

Running head: FORECASTING

Tax rates, and room to expand. Location, is it near the water, in a flood zone, or tornado alley.
Competition for our products or do we own the market? The management needs to make sure
they are following the business plan and that it is working, otherwise it needs to be re-evaluated
so shareholders can get the most for their money. Management also needs to be looked at so that
they are doing what is bested for the bottom line of the company.

Running head: FORECASTING

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References

Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning. ISBN: 9781285867977.