Last week, I got an email from a student, and he wanted to know how to predict company earnings. I replied him giving the following example.
You, as a security analyst, work on financial analysis of companies. The dividend yield, PE ratio, Debt-Equity ratio, Net worth, Price to book ratio, you name it and the ratio throws figures at you. The crux is not the numbers but the interpretation of it.
The same goes with financial modeling and forecasting of the company’s financials. In financial modeling, I think, it is the input that makes the modeling meaningful. Many times the analysts get confused and lost in their own financial models as they are not able to limit the scope of it and so, I prefer simple,easy-to-use model for predicting the financials of a company.
Lesson: Do not go for a complex model unless it is required.
Well, coming back to the point of predicting the earnings. I would like to give you a real-life example of two Indian-listed companies, Titan Industries and Unitech Ltd.
What are company earnings?
What is the earnings figure we are considering here? It is Earnings Per Share or EPS.
Let’s look at the following table and see which company’s EPS is easy to predict.
Which one do you think is easy to predict?
Company Earnings Estimates
You are right! It is Titan Industries which is giving strong EPS and that too in upward trend. No doubt, the share price reached Rs. 4000 in 2010 from Rs.40 in 2001 (100 times growth).
What propelled this growth? Many factors. More on this, later.
The point I want to make here is, go for companies which are easy to predict and then do the forecasting. There is no dearth of such companies in market and as a security analyst your job is to find such gems.
Here’s a detailed course on how to predict company earnings.
Have you found any such interesting company? Share your views here.