Capital Structure Decisions: Evaluating Risk and Uncertainty

Chapter Three

Predicting and Evaluating a Firm’s Performance

EVERYTHING IN THE WORLD is based on expectations about future events and their results. The bridge between the uncertainty of the future and the certainty of the past is a set of estimates generated from past information and futuristic assumptions. Most business decisions are based on this bridge, known as forecasting. The strength of this bridge is dependent on the estimates made about future events, associated returns, and risks. Past information that is available in annual reports, financial information websites, media reports, statistical services, customers, and management serves as the starting point for such analysis and interpretation. The ability and capacity of a CFO to determine his future course of action and his realistic goals are largely dependent on this assessment. In assessing the performance of a firm or predicting its future, we need to make comparisons. Our choice of actions would then be guided by what the firm perceives and what it can achieve. In this chapter, we discuss the statements given in annual reports and their evaluation techniques to develop and identify a firm’s goals and constraints.

A firm’s and its CFO’s ability and capacity to undertake operational and financial obligations that magnify the returns to achieve a strategic competitive advantage can be realised once the relationship between futuristic goals and constraints is established, using present and past financial and nonfinancial ...