Lesson 8 of 8 · 11 min
Industry-specific ratios and forecasting
Each industry has its own critical performance measures, and the results of ratio analysis, combined with judgment, feed forecasts that should cover a range of outcomes rather than a single number.
In short
- Industry-specific ratios capture what matters in a particular industry, e.g. same-store sales in retail or occupancy rate in hotels; they are especially important for early-stage companies not yet profitable.
- Regulated industries, especially banks, must meet regulatory ratios: capital adequacy, reserve requirements, liquid asset requirements.
- Business risk can be measured by the coefficient of variation of operating income, net income or revenue.
- Forecasts build on common-size and ratio analysis (e.g. expenses as % of forecast revenue, receivables from DSO), plus judgment.
- Forecasts should show a range: sensitivity analysis, scenario analysis and simulation.
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