Are the Forecasts Realistic? Gigo: Garbage in & Garbage Out
Autor: antoinedestier • October 31, 2015 • Presentation or Speech • 709 Words (3 Pages) • 1,071 Views
Assignment 5
Are the forecasts realistic? GIGO: Garbage in, garbage out. If the assumptions are not good, the entire forecast is flawed.
We should review the different assumptions. We can compare them to the average values for Y3-Y9, but averages can be affected by significant extreme changes which occur only once (cf. Revenue growth between Y8 and Y9 is approximately -30% versus values between 2% and 7% between Y5 and Y7).
The assumptions also reflect the management’s views, especially he management’s belief that the crisis/economic downturn should soon resolve itself, bringing business back to a ‘normal’ level.
- Revenue growth hypothesis are reasonable in the case that the crisis resorbs.
- EBITDA margin hypothesis are in line with what we observed in Y4-Y7. It might be too optimistic to believe DLH will maintain the same level of profitability than in the past.
- Interest rate & Tax rate assumptions are correct.
- Most assumptions seem realistic, except the EBITDA margin assumption, which is too optimistic (we can conduct tests by reducing it).
Assignment 6
Other things being equal, we change revenue growth to know how DLH can maintain its liquidity for the year. By using Excel’s solver, we find
E1 | E2 | E3 | |
Revenue growth | -10.6% | -3.7% | 2% |
By reducing its turnover, the company also reduces its costs, which can be interesting to cover short term liquidity risks.
The simulation on the EBITDA Margin:
E1 | E2 | E3 | |||
EBITDA Margin | 2,3% | 4,8% | 5,5% |
This confirms our doubts on the EBITDA Margin assumption.
Third scenario is a test on the inventory level.
E1 | E2 | E3 | E3 | E4 | |||
Level of inventoy (as % of revenue) | 22,6% | 18,8% | 18,2% | 20,2% | 20,2% |
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