Question

Help with the 2020 forecast part! Thanks

Exclude (000,000) in millions Revenue Cost of Goods Sold Gross Profit Selling, Admin, Other Net Operating Income Three Most Recent Years 2019 2018 $20,156,447 $15,794,214 $12,440.213 $9,967,538 $7,716,234 $5,826,676 $3,566,831 $2,999,763 $4,149,403 $2,826,913 SOURCE USED: SEC.gov 2017 $11,693,713 $7,659,666 $2,141,590 $1,892,457 ==Be sure to confirm OPERATING INCOME Total Assets at Year-End Shareholder Equity Y/E $33,975,712 $7,582,157 $25,974,400 $5,238,765 $19,012,742 $3,581,956 1. Sales Growth 27.6% 35.0% 3.2% (CY - PY)/PY 2. Profitability Gross Profit Margin Operating Margin Return on Assets Return on Equity 34.5% 7.2% 38.3% 12.9% % 34.0% 36.9% 10.2% % 30.0% GP/Rev NOI / Rev NOI / Assets OK to use Operating Income NOI / Equity OK to use Operating Income % A. My forecast for 2020 year's sales growth is because (list two reasons) 1. 2. % B. My forecast for 2020 year's oper'g. margin is because (list two reasons) 1. 2.

Answer 1

A. My Forecast for 2020 year’s sales growth is 20.5% to 21% because

1. It is high growth company. Though, there has been absolute growth in the sales during the last 3 years period and a consistent absolute increase in the sales amount but in terms of % it is showing decrease effect and it has been assuming that growth rate (to moderate) due to base effect. Base in 2019 has increased vs low base in 2017-2018 vs 2017 growth rate moderation is 7.4% (35%-27.6%). We have assumed moderation at 7% around, the expected sales comes to 20.5% (27.6%-7% moderation) and thus sales growth assumed to range 20.5%-21%

2. Absolute sales number has increased by 4.1mn/4.4mn, We assume similar trajectory after 2019 ie 4.25 mn (average of two) giving sales growth of 20.5%.

B. My Forecast for 2020 year’s operating margins is 22.6% ie+2%                                      vs last year ( because last year operating margin calculation wrong 10.2% instead of 20.6%)

1.Gross margin has expanded by 1.4% (38.3%%-36.9%)/2.4% (36.9%-34.5%) in 2019/2018 YOY. This implies either the company is able   to price higher with better product demand or its getting vendor rebates/has bargaining power vs its suppliers leading to better gross margins. Expecting gross margins to expand by 0.7% (lower vs last two years) as the trend is already towards reducing expansion ie 1% (2.4%-1.4%)difference in expansion between 2017-19.

2. Selling & Admin expenses have been showing reducing as a % of sales from 19% to17.7% between 2018-19 reflecting operational leverage. We expect this to reduce to 16.4% in 2020 forecast sales. This implies we forecast sale, admin expenses 3999845. Thus gives us operating margin at 22.6%.

Note: Computed net operating margin in the problem is wrong or the question is wrong but my solution is above based on inputs.