A financial statement model is the starting point for most valuation models, and valuation estimates can be made based on a variety of metrics, including free cash flow, EPS, EBITDA, and EBIT.

Developing a sales-based pro forma company model involves projecting future financial performance based on the company's anticipated sales growth.

Revenue Forecasting

• Project future sales revenue based on the identified drivers and assumptions. This can be done by applying growth rates to historical revenue or using more detailed forecasting techniques, such as bottom-up or top-down analysis.

• Consider seasonality or cyclical patterns that may impact sales. Adjust the revenue projections accordingly to reflect these patterns if applicable.

• Validate the reasonableness of the revenue forecast by comparing it to industry benchmarks, competitor performance, and macroeconomic indicators.

Operating Costs and Non-Operating Costs

Operating Costs

Analysts may perform cost analysis using a top-down, bottom-up or hybrid approach. They should pay particular attention to fixed costs. This is the first step of understanding economies of scale. The greater the quantity of a good produced, the lower the per-unit fixed costs. If a company enjoys economies of scale, its gross and operating margin tend to increase as it produces more products.

COGS has a direct relationship with the revenue of a company. Forecasting COGS as a percentage of sales is equivalent to forecasting gross margin percentage. Analysts should consider historical data, the impact of a company's hedging strategy, and competitors' gross margins, etc. Selling, general, and administrative expenses (SG&A) are generally less closely linked to revenue than COGS. Companies often disclose the different components of SG&A. Selling and distribution expenses will increase as sales increase, while other general and administrative expenses are less variable.

Non-Operating Costs

Financing costs. Interest expense depends on the level of debt on the balance sheet and the interest rate associated with the debt.

Income taxes. Any special tax treatment? Deferred tax assets or liabilities? Future tax changes? Be aware of three types of tax rates: the statutory tax rate, and effective tax rate and the cash tax rate.

Financial Statement Projections

Once the revenue forecast is determined, develop projections for other financial statement line items, including expenses, working capital, capital expenditures, and financing activities.

Analyze historical financial ratios and relationships to estimate future expense levels, such as cost of goods sold, operating expenses, and interest expenses.

Some balance sheet line items, such as retained earnings, flow directly from the income statement, whereas working capital accounts such as accounts receivable, accounts payable, and inventory are very closely linked to income statement projections. A common way to model working capital accounts is to hold efficiency ratios constant - working capital accounts will grow in line with the related income statement accounts.

Consider the impact of the projected sales growth on working capital requirements, such as accounts receivable, inventory, and accounts payable. Project working capital ratios (e.g. days of inventory, days sales outstanding, days payable outstanding) and then combined them with sales and cost of sales forecast to produce projected working capital accounts on the balance sheet.

Incorporate assumptions about future capital expenditures and financing activities, such as debt issuances, equity financing, or dividend payments.

Return on Invested Capital (ROIC)

Analysts can determine return on invested capital (ROIC), which measures the profitability of the capital invested by the company's shareholders and debt holders. The numerator is after-tax earnings but before interest expense. The denominator is invested capital, which is equal to operating assets less operating liabilities. High and persistent levels of ROIC are often associated with having a competitive advantage.

Building a robust sales-based pro forma company model requires a deep understanding of financial statement analysis, forecasting techniques, industry dynamics, and company-specific factors.