Trend analysis really a hidden regression analysis – and an ideal tool to forecast sales in a DCF

BVWireIssue #93-2
June 16, 2010

At the NACVA conference two weeks ago in Miami Beach, Richard Eichmann (FTI Forensic and Litigation Consulting) walked his audience through a case study that put regression analysis at the center of revenue forecasts.  “Rarely do I see valuation analysts utilize regression analysis in forecasting top line sales—arguably the key driver of a valuation. Value = Economic benefit/Risk—and we can do a better job of accounting for uncertainty in the numerator with a projection of the expected income stream within our valuations,” Eichmann asserted.  “The best forecast is the one that yields the forecast error with the minimum variance.”  Since regression analysis expresses relationships with equations, trending sales and year-over-year growth rates (Eichmann recommends at least 5 years' worth of financial inputs—or at least enough to cover a complete business cycle) can deliver quantitative support for your revenue projections.
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