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PROSPECTIVE ANALYSIS

Prospective analysis is important for security valuation, management assessment and


assessment of solvency. For management assessment, the prospective analysis will help to
forecast the financial performance examine the viability of company strategic plan. It is also
useful in the scope of assessment of solvency as it help creditor to assess a companys ability
to meet debt, services, requirement, both short term and long-term. Projected Financial
Statements gives us an indication about the impact of certain action like going in for
expansion; mergers or acquisition; valuable changes in company policies etc. on the future
financial statements. It is an important component of building up to a successful plan for the
future. We can have projection for balance sheet, income statement and statement of cash
flow. For this assignment, we choose to do the projection for income statement as it is the
indicator of the company future performance.
In order to perform the projection for income statements we need to start with the :
1) Sales Growth
This growth rate projection is done based on certain macro and micro economic
factors like PEST analysis; industry analysis; company-wide analysis. Hence, having
considered all these factors one may safely arrive at the projected revenue by
multiplying the revenue growth with the most current period revenue generated.
2) Gross Profit Rate
Project the next years gross profit using the most recent year gross profit rate
derived from subtracting the COGS from the current year sales and expressed as a
percentage of the current sales. This rate is then multiplied with the projected sales
figure to arrive at future gross profit.
3) COGS
We can easily calculate the projected COGS for the company as we get the gross
profit figure. We just minus sales figure with the gross profit to get COGS.

4) Operating Expenses
This could also be easily expresses as a percentage of current sales. Once, we get
the operating expenses by sales rate, and then we can straight away multiply this rate
with the projected sales rate in order to get the projected operating expenses.
5) Depreciation Expenses
This expense can very well be projected by finding out the historical depreciation
rate as a percentage of the prior period Gross PPE. That percentage is further
multiplied with the current year sales figure in order to arrive at the projected
depreciation expense in the next year.
6) Interest Expense
Interest expense is derived by diving the current years interest expense by the
previous year interest-bearing debt outstanding. Having got this rate, it is multiplied
with the current years rate in order to arrive at the projected Interest Expense for the
current year.
7) Income Tax Expense
This is calculated by multiplying the projected income before tax with the tax-rate
implied from the current years tax given as a percentage of current years income
before tax.

Here is the income statement of both companies (Nestle & HupSeng) that we had
chosen and the calculation of the item (listed above):
Income Statement of NESTLE For The Year 2013 & 2014

Sales
Cost of Goods Sold [COGS]
Gross Profit
Selling, General, and Admin Expense

NESTLE 2013

NESTLE 2014

(RM)

(RM)

551,075,000

551,375,000

551,075,000

551,375,000

1,760,000

2,717,000

Depreciation and Amortization Expense


Interest Expense
Income before Tax
Income Tax Expense
Income (loss) from extraordinary item
Net income