Advances in Economics, Business and Management Research, volume 178

Proceedings of the 2021 International Conference on Enterprise

Management and Economic Development (ICEMED 2021)

The Research of Financial Forecasting and Valuation

Models
Ziliang Shang1
1
Graduate School of Management, Clark University, Worcester, MA 01610, USA
Corresponding Author’s Email:[email protected]

ABSTRACT
Financial analysis has always been a particular focus of scholars around the world. With the development of economy,
domestic and foreign scholars continue to improve their financial analysis methods. However, there are few literatures
to study the development process of financial analysis and the important factors that affect enterprise value. Based on
this situation, this paper systematically reviews and sorts out the relevant research results of the origin and the
development of the financial analysis. Then it introduces the driving factors of the enterprise value from financial and
non-financial aspects and the valuation methods that are concerned mainstream. At the end of this paper, it raises
potential problems with current mainstream valuation methods by comparing the calculated results with the actual
results and put forward the possible improvement direction to solve these problems. Hope this paper can provide useful
reference for scholars to further study this problem.

Keywords: Financial analysis, value drivers, valuation models

1. INTRODUCTION needs to carry on the whole network or the whole process

management with wider scope and deeper value chain.
With the establishment and improvement of China's Unfortunately, the current financial analysis is still
market economic system, the requirements for enterprise difficult to break through the boundaries of enterprises
behavior are becoming more and more standardized and and make an overall analysis from the perspective and
scientific. Financial analysis is an important way to thinking of the whole value chain and industry chain. To
evaluate the operating conditions of enterprises. It understand these problems and improve them is the
evaluates and analyzes leverage, asset management, direction that financial analysts should work hard for.
profitability and solvency of the enterprises. Financial
analysis is not only the summary of completed financial 2. THE DEVELOPMENT OF FINANCIAL
activities, but also the premise of financial forecast, FORCASTIN AND VALUATION MODELS
playing a role of connecting the preceding and the
following in the cycle of financial management. It is of 2.1. Budding Period of Financial Analysis
great significance to carry out the work of financial
analysis deeply. The budding period of financial analysis started from
the American banking industry at the beginning of 20th
However, at the present stage, there are still many
century and ended with the emergence of the concept of
problems in the financial analysis of China, affecting the
financial statements in 1919. Financial analysis in
financial analysis function in practical work. Financial
western countries started from the credit investigation
statements reflect the historical operation of an enterprise
conducted by bank capitalists on enterprises. The banks
based on historical data, which is lagging. In our rapidly
that issue loans took the analysis of financial statements
changing society, the results of analysis only based on
as a technical means to investigate the operation stability
historical data are certainly unsatisfactory. At the same
of enterprises that received loans. In 1900, American
time, with the interaction among the upstream
scholar, Thomas Uduro, first put forward the concept of
manufacturers, the middle suppliers, and downstream
financial analysis in the Railway Report Decomposition
customers more and more, the management and
and made a systematic study of a series of basic concepts
development of the company also need to gradually
of financial and accounting statement analysis. In 1919,
broke the boundaries of the company itself. The company

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 Advances in Economics, Business and Management Research, volume 178

American financial scholar Alexander Wall wrote Ratio Because there are many defects in financial indicators, it
Analysis System. A series of books, such as Novi Bell's has gradually become a consensus in academic circles to
Profit and Loss Analysis Chart and Stefan Gill's Trend reform them.
Analysis, have further enriched and developed the
theories and methods of financial statement analysis. All 2.3. Progressive Maturation Period of Financial
these indicate that financial statement analysis has been Analysis
formed as a relatively independent discipline. [1]
In the late 20th century, financial analysis reached a
2.2. Development Period of Financial Analysis mature stage. Scholars have put a lot of effort into
predicting future financial conditions. In 1990, Stern
With the deepening of the practice of financial Stewart Consulting Company first proposed EVA
analysis, financial analysis has entered the development performance evaluation indicator. The innovation of EVA
stage, which lasted from 1920 to the end of the 20th lies in the comprehensive consideration of the cost of
century. At this stage, American scholars put forward a capital of the enterprise and adjusts the profit obtained
series of single financial analysis methods. For example, according to GAAP from the fundamental purpose of
Alexander Wall proposed the most primitive ratio enterprise value appreciation. So it can evaluate the
analysis system. However, the ratio analysis cannot enterprise performance more accurately. Focusing on
reflect the corresponding relationship between the ratio corporate cash flow, American scholar Pewa(1999)
and balance sheet. To remedy this deficiency, James h. systematically introduced the basic principles of cash
Bliss(1923) and Stephen(1925) put forward comparative flow, the skills of cash management, the influence of
analysis method and trend analysis method respectively, options and derivatives on cash flow and the comparative
which added many other single financial indicators. They analysis of cash flow statements. Charles Gibson(2002)
tried to use industry average and dynamic financial data believes that Increasing the attention to the changes in
to better reflect the operating results of enterprises. cash flow can timely detect problems in the daily
Regrettably, these financial analysis methods only have operation of the enterprise.
single indicative and cannot comprehensively analyze the
financial situation of enterprises. Therefore, scholars In addition, because financial indicators cannot meet
began to put forward a comprehensive financial indicator the needs of financial analysts and corporate stakeholders
system. American DuPont scholars Pierre DuPont and under the principal-agent system, scholars improved
Donaldson Brown (1919) put forward the DuPont Economic Added Value by integrating value management
analysis system, which can deeply analyze and compare and strategic management ideas and proposed Balanced
the business performance of enterprises, promote the Score Card. Merton Miller and Franco Modiani(1958-
operational efficiency of the company's assets and 1961) put forward the theory of economic value added
maximize the benefits of shareholders. [2] (EVA). It is not a simple accounting profit, but an
economic profit considering the opportunity cost of
Although the financial analysis method has capital, eliminating the distortion of traditional financial
developed from single financial analysis index to indicators in a certain extent. Then, Harvard University
comprehensive financial analysis index, the professors, Robert and David(1992), put forward the
comprehensive financial analysis index also has some balanced scorecard under the guidance of the two core
limitations. Then, Alan J.Marcus(1992) and Krishna g. concepts of Strategic View and Balanced View. They
Palepu(2000) improved the indicators of DuPont analysis added three non-financial indicators, which are customer,
method respectively. Alan J.Marcus disintegrated some internal business process, and learning and growth, on the
indicators of DuPont analysis method at a deeper level basis of former financial index as a strategic analysis tool
and studied the application of financial leverage in used to a comprehensive enterprise management. In
DuPont analysis method. Replacing ROE with addition, Kaplan and Norton(2000) put forward the
sustainable growth, Krishna g. Palepu invented The concept of strategy map, which helps BSC transform
Palepu system, which is one of the four financial ratio strategic vision into measurable organizational and
analysis indicators currently used. personal indicators and realize the strategic management
The traditional analysis of driving factors of function of BSC. [3]
enterprise value is based on financial indicators, which with good foresight and value correlation, non-
reflect historical information with lag and fail to reflect financial index is attracting more and more attention as
the future prospects of the enterprise. It may lead the innovation of traditional enterprise value analysis.
managers to violate the long-term strategy of the Scholars believe that non-financial indicators can make
organization for short-term interests. At the same time, managers' behaviors consistent with the priority strategies
the traditional financial analysis is not related enough to of the organization, thus promoting the implementation of
the enterprise goal. It ignores the internal and external corporate strategies and the improvement of business
relations of enterprises and is difficult to meet the needs performance. However, there are also problems to be
of strategic decision-making and operation management. improved, such as the lack of executable theoretical

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guidance for the selection of assessment indicators, the indicators for analyzing and evaluating the short-term
unknown determinants of the quality of non-financial solvency of enterprises mainly include current ratio, quick
indicators, and the lack of detailed research on the weight ratio, etc.
allocation of performance indicators.
3.1.2. Asset management
3. THE DRIVING FACTORS OF
ENTERPRISE VALUE The operating capacity of an enterprise reflects the
capital turnover situation of an enterprise. The analysis of
From the perspective of enterprise value creation, the this indicator can show the operating situation of an
value driving factors can be divided into financial driving enterprise and its management level. If the capital
factors and non-financial driving factors by combining turnover is good, it means that the enterprise has a higher
the operation and financial aspects. Financial driving level of operation and management and a higher
factors are applicable to a wide range of analysis methods efficiency of capital utilization. The operation capability
because their data are easy to obtain and the analysis analysis of an enterprise is also a financial analysis of the
process is relatively simple. However, it can not directly capital turnover of an enterprise. Its purpose is to reveal
help the management to make business decisions. And the level of operation and management of an enterprise in
financial value drivers do not focus on long-term value an all-round way. The efficiency of using various assets
growth, but focus on short-term business performance, and the speed of turnover of an enterprise are directly
which is prone to short-sighted behavior. Non-financial related to its debt paying ability and profitability.
indicators can measure the process indicators of the Therefore, the operating ability of an enterprise reflects
implementation of various behavioral processes to its operating performance. A detailed analysis of the
achieve results and they are convenient for enterprises to operating capacity of the enterprise can help investors,
allocate resources effectively. Therefore, it is not creditors and operating managers have a deeper
comprehensive to study enterprise value only by financial understanding and mastery of the solvency and
analysis. Non-financial value drivers are also essential in profitability of the enterprise and make an objective,
the study of value drivers. [4-5] comprehensive and fair evaluation of the business
performance. The analysis of operating capacity is
3.1. Financial Drivers achieved through the analysis of a series of turnover
indicators, such as accounts receivable turnover,
From the perspective of enterprise value creation, the inventory turnover, total assets turnover and fixed assets
value driving factors can be divided into financial driving turnover, etc.
factors and non-financial driving factors by combining
the operation and financial aspects. Financial driving 3.1.3. Profitability
factors are applicable to a wide range of analysis methods
because their data are easy to obtain and the analysis Profit is the basic material guarantee for the
process is relatively simple. However, it is not continuous survival, operation and development of an
comprehensive to study enterprise value only by financial enterprise. It is not only closely related to the interests of
analysis, and non-financial value drivers are also investors, but also closely related to the interests of
essential in the study of value drivers. Non-financial creditors, managers and other relevant parties. The
indicators can measure the process indicators of the analysis of the profitability of the enterprise is generally
implementation of various behavioral processes to the analysis of the main business activities of the
achieve results, which is convenient for enterprises to enterprise. Some abnormal or special business activities
allocate resources effectively. At the same time, we can will not be taken into consideration as a kind of
use the valuation model to determine the value of the sustainable profitability in the analysis. The performance
existing variables to help predict the future trend and of an enterprise's profitability is mainly based on the
solve the possible problems. [6] analysis of the enterprise's operating income, expenses,
investment income, profit, net interest rate on sales, return
3.1.1. Liquidity on equity and other indicators and comprehensively
judge, analyze and evaluate the profitability of an
Solvency analysis refers to the analysis of the ability enterprise.
and security degree of an enterprise to repay various
debts. It can effectively reveal the financial risks of 3.1.4. Growth ability
enterprises. The index of analyzing the long-term
solvency of enterprises mainly includes asset-liability The growth ability of the enterprise refers to the
ratio. Analyzing the short-term solvency of enterprises ability of the enterprise to grow continuously in the
mainly focuses on studying the relationship between process of carrying out a series of business activities. If
current assets and current liabilities of enterprises, as well the enterprise want to survive, stand firm, grow in the
as the changes of related projects. The financial unpredictable market changes and keep their advantages

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in the commercial era with rapid technological 3.2.3. Strategic relationship

innovation, they need to continuously expand the
production scale in order to better cope with the Analyzed from the business level, relational capital is
competition risks in the market. Managers of enterprises the identification relationship formed in the long-term
should not only focus on the growth of quantity, but also cooperation between an organization and other external
keep the concept of long-term development of enterprises stakeholders. It is the knowledge attached to the
in their mind. The indicators to analyze the growth ability relationship, with specificity and uniqueness. Relational
of an enterprise mainly include the growth rate of main capital constantly adds value through operation and
business income, the growth rate of net assets, the growth investment and brings new competitive advantages to the
rate of total assets and the growth rate of net profits. organization. From the difference between the enterprise
and other cooperative objects, the relationship capital can
3.2. Non-financial Drivers be considered from the following relationships: customer
relationship, distributor relationship and supplier
There are many factors that can influence the future relationship, strategic partnership relationship,
development of the financial, including customer shareholder relationship and creditor relationship.
satisfaction, quality of products and services, the
company strategic target, the potential development 3.2.4. Innovation
ability, innovation ability, market share, etc. However,
manpower, enterprise architecture, innovation ability as Only when investment and innovation collide can the
well as the supply chain relationship are more important spark of wisdom be touched. The condensation between
compared with others. [7] them can finally become the innovation capital of
enterprises. This kind of knowledge-based innovation
3.2.1. Reserve of talents capital mainly includes four index dimensions:
innovation ability, innovation achievement, innovation
For enterprises, human capital is the accumulated mechanism and innovation culture. The continuous
assets of employees' knowledge, which is the competence practice of innovation capital in enterprise operation can
knowledge of enterprise management team. This make the quality of products and services respected by
competency knowledge mainly includes the employee's customers, meet the new needs of consumers, and
educational background, work experience, industry constantly drive the value creation of enterprises.
experience, specialized skills and work attitude.
To sum up, among the non-financial value drivers,
Therefore, in the context of research-driven enterprise
human capital is like a foundation stone, without which it
value creation, human capital should take the lead and
is like a house without a foundation; Structural capital is
become the primary consideration of non-financial
the glue that integrates human capital. Innovation capital
driving factors. In terms of human capital research, it can
is the driving force factor, which directly determines the
be summarized into four indicators: employee
ability and duration of sustainable development of
knowledge, employee experience, employee attitude and
enterprises. Relational capital is like a window connected
employee ability.
with the outside world, and external direct transaction
cooperation. Only by giving full play to the synergistic
3.2.2. The structure of capital effect of these four factors can the internal value of the
Structural capital is the knowledge resources enterprise be better driven and the value of the enterprise
contained in the organizational structure. It is the basic be increased and maintained continuously.
framework of an enterprise and the overall system and
process for an enterprise to solve problems and create 3.3. The valuation methods
value. Structured capital has organizational integrity,
At present, the mainstream valuation methods in
specificity, and can be copied and shared, belonging to
China include the comparable company method and the
the whole enterprise. It can activate and catalyze human
discounted cash flow method. Also, there are a small
capital, make human capital give full play to and rely on
number of researchers use the option pricing model to
enterprise platform, and promote the accumulation of
measure the company value. The next part focuses on
structural capital. When we study the structural capital
these three valuation methods and discusses their
which drives the non-financial value of enterprises, we
advantages and disadvantages as well as their possible
mainly analyze it from four index dimensions: business
applicability. [8]
process, information system, organizational structure and
enterprise culture.
3.3.1. Relative valuation methods
Relative valuation method, also known as market
method or comparable company method, is an indirect
evaluation method. The specific process refers to

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selecting similar industries as benchmarks and accounting standards, the performance of net assets is
conducting direct or analogy analysis on target different. The analogy does not constitute objectivity.
enterprises. The evaluation process of relative valuation Finally, for some industries with low net assets, such as
method is relatively simple and easy to use. Commonly high-tech industries and service industries, the P/B
used relative valuation methods include the price-to- method is used to underestimate the enterprise value.[9]
earnings ratio (P/E) and the price-to-book ratio (P/B).
To sum up, the advantages of relative value method
are: calculation is simple and the principle is easy to
3.3.1.1 P/E ratio method understand. As long as the financial data of the target
The P/E ratio method usually selects the average P/E enterprise is obtained from the relevant database and
ratio of several companies in the same industry to network, there is no need to carry out too much technical
estimate the value of the enterprise. Then estimates the analysis and prediction. Therefore, the relative value
enterprise value according to the earnings per share of the method is considered to be a simple, fast and low
enterprise. The specific formula is as follows: technical risk value assessment method. However, its
shortcoming lies in that it does not take into account the
Enterprise value = the selected industry average p/e operational differences among enterprises. So the
ratio * be evaluated enterprise's earnings per share estimation results are not objective enough and may be
The P/E ratio method is typically used for greatly affected by the value of the analog enterprises.
consistently profitable industries and for companies that
are unlisted or have just gone public. From the 3.3.2. Relative valuation methods
calculation formula, the P/E ratio method is simple to
The absolute valuation method, also known as the
operate and the required data is easy to obtain. The P/E
discount method, is the value of the enterprise based on
ratio method considers the profit level of the enterprise,
the evaluation of the operating level of the enterprise. It
reflecting the relationship between investment and
refers to the future expected earnings of the enterprise
income. However, the P/E ratio method also has great
discount to obtain the existing value of the enterprise.
limitations. Firstly, this method requires that enterprises
Absolute valuation method generally includes two
have the ability of continuous profitability. For
methods: economic value added method(EVA) and
enterprises with negative earnings, the estimated results
discount cash flow method(DCF).
are meaningless. Secondly, there is a high requirement
for the selected enterprises. Even if the same industry, The idea of the discounted cash flow method is to sum
business model, management level and so on are not the up the discounted value of the cash flow generated by the
same, so the analogy estimation has a certain subjectivity; company's assets in the future period to calculate the
Finally, the P/E ratio method is not only affected by the present value of the enterprise. Depending on the category
enterprise's own profit level, but also affected by the of cash flow, the discounted cash flow method can be
overall economic situation. When the economy is divided into equity discount model and free cash flow
booming, the assessed value will be overestimated. And model. And according to the category of the free cash
when the market is in recession, the estimated value will flow, the latter can be divided into equity free cash flow
be underestimated. discount model and free cash flow discount model. The
free cash flow discount model is the most common form
3.3.1.2 P/B ratio method of DCF model valuation model. However, DCF valuation
model is very technical. In the process of valuation, it is
Similar to the P/E ratio method, the P/B ratio method necessary to determine the forecast period, discount rate
is more reflected in the net assets of the enterprise. The and cash flows in the forecast period. Therefore, DCF
higher the net assets of the enterprise, the higher the valuation model inevitably has some subjective factors of
evaluated enterprise value. The specific calculation the evaluator. And the selection of parameters will
formula is as follows: directly affect the accuracy of the final valuation results.
Enterprise value = the selected industry average p/b *
be evaluated enterprise net assets per share 3.3.3. Option pricing model valuation method
Unlike the P/E ratio, the net assets of general At present, the option pricing model valuation method
enterprises are positive, which can be used for most has also formed a relatively perfect calculation method
enterprises. In addition, compared with the net income, system. Besides the commonly used binary tree at present,
the net assets are not easy to be manipulated artificially it also includes finite difference method and Monte-Carlo
and the changes in the net assets of enterprises can well simulation method. The finite-difference method starts
reflect the changes in the value of enterprises. Similarly, from the final moment of the validity of the option and
both the P/B and P/E ratios methods select analogical uses the numerical iterative method to push back to the
enterprises. In this respect, the evaluation results are not initial moment of the option(Hull and White, 1990). It is
objective enough. In addition, enterprises adopt different very suitable for the pricing of American options. But its

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disadvantage is that it is not good at dealing with the NAURA is a large comprehensive high-tech company
pricing of path-dependent options and high-dimensional with specialized electronic equipment and electronic
options. Monte-Carlo simulation is a widely used components as its main products, integrating research and
numerical method at present. Boyle(1997) used the development, production, sales and service. The company
Monte-Carlo simulation method for option pricing. He is China's largest electronic equipment production base
pointed out that the variance reduction techniques can and high-end electronic components manufacturing base.
improve the computation efficiency of the Monte-Carlo Research and development products are widely used in
simulation method. Then he used standard Monte-Carlo semiconductor, photo-voltaic, lithium battery and other
simulation method and modified Monte-Carlo simulation emerging industries as well as precision instruments,
method, which combined the dual variables technology automatic control and other fields.
and control technology, to price the European call option
There are many possibilities for the company's future
with dividends. The least-square Monte-Carlo simulation
growth. Company’s 2020 incentive program will fall to
method proposed by Longstaff and Schwartz (2001) is
the ground, which is beneficial to realize the
also an important research direction for pricing American
technological breakthrough and the long-term
options. [10]
development, the IC equipment revenue will
At present, the valuation process in China usually breakthrough point of profit, and the company will
uses the DCF method to initially estimate the value of the accelerate the growth in IC equipment and photovoltaic
target company. Then adjusts the measured results equipment fields. Referring nearly two years of revenue
through the comparable company method. The option growth and important financial ratios of the company, the
simulation method is relatively more accurate for the DCF model, which is used to calculate the company's
valuation of enterprises and can freely increase or stock price at end of 2020, makes the following
decrease the variables that need to be paid attention to. It assumptions:
is usually used for some industries with insufficient
The company will go through three different stages of
historical data or special industries, such as various
revenue growth. The first, a five-year high growth period
emerging industries. However, option pricing model is
of 40% revenue growth since 2020; the second, revenue
more complex compared with other methods. It is rarely
growth geometric slowed to 6% over the next six years;
used in China at present.
the third, a 6% growth in a sustainable growth period.
EBITDA accounting for 15% of operating revenue. The
4. THE VALUATION OF NAURA USING enterprise income tax rate is levied at 20% according to
DCF MODEL the current regulations of the state. The discount rate is
10%, referring to the average capital cost of current
The next part will select a listed company for
market enterprises. The cash assets and long-term
valuation analysis and find possible problems and
liabilities in the 2020 annual report is same with the data
possible directions for improvement for current valuation
in the 2019 annual report. The results are as follows:
methods by analyzing the reason of the different between
the measured results and the actual results. [11-13]
Table 1 DCF results

CF1 CF2 CFn CF * 1  g 

DCF     PV 
1  r  1  r 
1 2
1  r n r  g 
CF = The cash flow for the given year.

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CF1 is for year one, CF2 is for year two, CFn is for accounting theory and is limited by the current accounting
additional year system. At the same time, the specific value chain of
different industries is also very different. So, it is difficult
r = the discount rate to summarize a set of standard evaluation system. Future
g = sustainable growth rate research could go further in this area.

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