Simple Forecasting

Chapter 7 gives us a short-cut formula for the drivers of residual income from operations:

The formula also gives us a short cut for forecasting future residual income. If our financial statement analysis indicates that particular drivers are fairly constant, then forecasting is simplified:

• If ATO is constant, future ReOI is given by a forecast of Sales and PM
• If PM is constant, future ReOI is given by a forecast of Sales and ATO
• If PM and ATO are constant (and thus RNOA is constant), future ReOI is given by a forecast of Sales