Security Analysis and Business Valuation on Wall Street – A Comprehensive Guide to Today′s Valuation Methods : [PDF Download]

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“The typical research report evaluates a business in the following way: The firm is reviewed and researched under the top-down approach. The top-down approach utilizes what is called the chain of projections, first made popular by Graham and Dodd.

Analyses are completed and projections are performed at five critical levels in the evaluation. The top of the analysis is a review of macroeconomic trends for the country in which the subject company’s operations are based.

Subsequent research is then focused on descending subject areas, beginning with an evaluation of the capital markets and followed in succession by an industry analysis, a company analysis (i.e., a microeconomic analysis), and a financial statement analysis.

Macroeconomic, capital market, industry, company, and financial data are projected from these analyses. Because the dominant variables in many of these projections are macroeconomic, the key projection assumptions lie in the macroeconomic forecast.

There is then a cascade of dependent variables that flow from the top assumptions. Consider, for example, apparel retailing companies: The number of clothes that an average store sells in a given year is going to be largely dependent on the strength of the overall U.S. economy. Obvious independent variables might be new apparel fashion trends and the store’s advertising expenditure.”

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