CONCLUSiON

Of the various types of analysis of financial statements, projecting future re­sults and ratios requires the greatest skill and produces the most valuable findings.

The prominence of the chance element in the forecasting process means that analysts should not be disheartened if their predictions miss the mark, even widely on occasion. They should aim not for absolute prescience but rather for a sound probabilistic model of the future. The model should log­ically incorporate all significant evidence, both within, and external to, the historical statements. An analyst can then judge whether a company’s pre­vailing valuations (e.g., stock price, credit rating) are consistent with the possible scenarios and their respective probabilities.

By tracking the after-the-fact accuracy of a number of projections, an analyst can gauge the effectiveness of these methods. Invariably, there will be room for further refinement, particularly in the area of gathering infor­mation on industry conditions. No matter how refined the methods are, however, perfection will always elude the modeler since no business cycle precisely recapitulates its predecessor. That is what ultimately makes look­ing forward with financial statements such a challenging task. The lack of a predictable, recurring pattern is also what makes financial forecasting so valuable. When betting huge sums in the face of massive uncertainty, it is es­sential that investors understand the odds as fully as they possibly can.