Projections are financial estimates of a company’s future performance. They can be prepared for various purposes, such as to inform an equity investor about the potential return on their investment.
There are several types of projections that can be prepared for an equity investor, including:
1.Pro forma financial statements: These are projections of a company’s future income statement, balance sheet, and cash flow statement. They can be used to estimate the company’s future profitability, financial position, and ability to generate cash.
2.Valuation models: These models use financial projections to estimate the intrinsic value of a company’s equity. They can include discounted cash flow analysis, price-to-earnings ratios, and other techniques.
3.Sensitivity analysis: This analysis uses projections to test the impact of different assumptions on a company’s financial performance. For example, an equity investor may want to see how the company’s projections change if there is a decline in sales or an increase in costs.
It is important for equity investors to carefully review projections before making an investment decision. Projections are based on assumptions about the future, and there is always the risk that actual results may differ from the projections. Equity investors should also consider other factors, such as the company’s management team, competitive landscape, and market conditions.
Overall, projections can be a useful tool for equity investors to better understand a company’s potential financial performance and assess the risk and return of an investment. However, they should be used in conjunction with other information and should not be relied upon solely.