Income Statement Projections

Let’s now build out our earnings projections. First, we add a section just below the income statement to group key metrics that summarize the performance of the business. We have included general performance metrics here, but note that commonly used performance metrics can vary by industry. We will add more metrics later, but these will do for now.


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After computing these metrics for the historical period, we hold them flat over the projected period, such that projected performance is in-line with historical performance. This flat assumption is a good starting point, but your views on the future performance of the business may lead you to tweak these assumptions. Sales margins (e.g. COGS/sales) in the first projected period linked to the MRY column are colored blue to identify them as assumptions (inputs and assumptions are usually colored blue).

Note the calculation of amortization expense—unlike other P&L items, it is not driven as a percentage of sales. Rather, amortization of intangible assets is often projected to occur in discrete dollar amounts often equal to the most recent period’s amortization expense. To project intangible assets as a percentage of sales would imply that the business brings intangibles onto its balance sheet and amortizes them off in the regular course of business. For most businesses, however, intangibles are created from non-recurring events such as M&A. On the other hand, depreciation is projected as a percentage of sales. That is because recurring capital expenditures generate fixed assets that are depreciated over time.

For public companies, we often use equity research analyst/broker estimates to the extent they are available, rather than just assume flat performance from the first projected period as we have done here. Simply hardcode the estimates into the P&L where appropriate. You may use consensus projections, or estimates from a single analyst/broker that is generally in-line with consensus. Analysts/brokers do not normally make projections beyond two or three years, so you would need to project the P&L differently in subsequent periods (perhaps by continuing the trends projected by analysts and/or assuming flat performance from the last analyst-projected period).

There are a few placeholder items we cannot project at this time (e.g. interest expense, which requires a separate debt schedule), and we have shaded them pink to remind us to address them in a subsequent step.

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