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How to Forecast Revenue Growth?

As stock investors, we need to be able to have an idea of the growth prospects of our investments. This means being able to forecast the company’s revenue and profit over the next few years. However, that is easier said than done. There are numerous aspects of a business to consider when forecasting earnings.

With that in mind, I thought it might be useful to look at some aspects of a business that we as investors should look at when trying to determine how our investments would perform in the future.

Industry trends

The trends of the market that the business is operating in are one of the key predictors of how the company will fair. For instance, the e-commerce industry in South East Asia is predicted to grow at 32% compounded annually, from 2015 to 2025. As a consequence, businesses that operate in this space can reap the benefits and grow in tandem.

Knowing the market and industry trends can also give us an idea of how big a company can get, and what are its real long-term earnings potential.

Market share information

The next aspect of forecasting is to identify how much market share a company will gain or lose over the next few years. This data can be found in a company’s earnings reports and management discussion section.

A company that is aggressively growing and gaining market share will be able to increase its revenue faster than the industry as a whole. To make an accurate estimate of revenue growth, we, therefore, should take into account both industry trend and company market growth trend.

Take into account individual segments

Most companies operate in more than one segment. Even though they have a core business model, many companies may have diversified businesses in other areas. Take Jack Ma’s Alibaba for example. Its main business is an e-commerce platform, but it also has other sources of revenue like cloud computing services and others.

To make a useful forecast of its future revenue, we will need to gauge the business prospects of each segment individually and add them up.

The Foolish bottom line

Forecasting a company’s future performance is key to any investor’s decision. If done accurately, it can give us an idea of the company’s growth potential and the price to pay for the firm’s shares.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.