lookingatthemostlogicalsourcefortheseestimates,which
is the company’s own past, but pinpoint some dangers
associated with relyingon history.We alsoconsider using
estimatesforthefutureprovidedbythoseweviewasmorein
theknow,whichwouldincludethecompany’smanagement
andanalyststrackingthecompany.Weclosethesectionby
presenting the link between growth and a company’s
fundamentals.
Past as Prologue
Whenestimatingtheexpectedgrowthforafirm,wegenerally
beginbylookingatthefirm’shistory.Howrapidlyhavethe
firm’s operations, as measured by revenues or earnings,
grownintherecentpast?Whilepastgrowthisnotalwaysa
goodindicatoroffuturegrowth,itdoesconveyinformation
thatcanbevaluablewhilemakingestimatesforthefuture.In
thissubsection,webeginbylookingatmeasurementissues
thatarisewhenestimatingpastgrowthandthenconsiderhow
past growth can be used in projections.
Estimating Historical Growth
Givenafirm’searningshistory,estimatinghistoricalgrowth
ratesmayseemlikeasimpleexercise.Butthereareseveral
measurementproblemsthatmayarise.Inparticular,wehave
to consider the following:
Computational Choices
Theaveragegrowthratecanvarydependingonwhetheritis
anarithmeticaverageorageometricaverage.Thearithmetic
averageisthesimpleaverageofpastgrowthrates,whilethe