In my attempt to break into sell-side research, I have ben, for a while, writing research reports with detailed financial models. I would say I am an ABOVE AVERAGE modeler (for a non sell-side associate, of course!) but am trying to take things up a notch by doing earnings estimations as well. I have always struggled with some of the line items in the P&L and was hoping that someone could shed some light on a couple of my queries.
How do you guys model DTL/ DTAs. Do you maintain separate scehdules for their tax and accounting books?
How do you forecast Cash from Investing line items such as Sale/ Disposals or financing line items such as buybacks / option exercises
How do you model Balance Sheet items such as LT Investments, Goodwill that are not tied to working capital / debt.
I would really appreciate some guidelines and am sure other people in my position would love to know the same. Thanks in advance!
1 - Deferred taxes are simply the difference between the taxes paid and the taxes accrued. If you don’t model these your balance sheet will be off.
2 - Sales/disposals should be modeled consistent with past rates of disposal. For example, if a company consistenly sells 10% of its PPE purchases you should assume that same level going forward. Of course, it’s never this easy so you need to provide your best estimate of what that level will be.
3 - Long-term investments are generally treated like cash and I typically do not assume any change to this line item since these are funded by free cssh flow. For example, Apple has a ton of LT marketable securities that were purchased with their free cash flow. These are essentially just undistributed cash.