Essay

As sales revenue has a direct relationship with the amount of profit that the company makes, our company Bulls and Bears Financial Ltd. has also analysed profitability of Foster’s group on annual basis. Now the amount of profit made by the company has a direct impact in the amount of dividends paid back to the shareholders, so we have forecasted the value of earnings per share as well. Earnings/share Forecasting value will help us in knowing if it would be profitable to invest in this company or not.

Profitability

Our company has used Foster’s profit data for past ten years i.e. from 1998-2007 for analysing and forecasting the profitability of the company for the year 2008. Linear Regression Line model was used to forecast the profit value for the year 2008. Using this model we plotted the graph between sales and net profits.

Linear Regression Line Model for Profitability

From the above graph of Profitability, we can clearly see that the data points are scattered whereas there is a linear trend in the forecast value. This clearly indicates that although the correlation (r) between the two variables is positive i.e. 0<r<1, but still the two variables are not very closely related to each other. This non-linear relationship between the two data may be due to the seasonality in the value of sales.

Using the slope and the intercept function in the Excel Sheet, the values of both the parameters were calculated. The value for intercept was calculated as ‘a= -160.0836’ and the value for slope as ‘b=0.1927’. We analysed profitability on the following categories:

&#61607; Error analysis

The error is given by the difference between the demand and the forecast values. The error analysis is obtained by calculating:

Bias: It helps in determining the accuracy of the forecasting model by measuring the total error and its direction.

Mean Absolute Deviation (MAD): The MAD value determines the accuracy by taking the average value of all the absolute errors.

Mean Square Error (MSE): The MSE value determines the accuracy of forecasting model by taking the average of the squared error terms for a forecasting model.

Standard error: This error value is calculated using the standard deviation formula.

MAD value for profitability is : 217.8645

MSE value for profitability is : 57,135.72

Standard error for Profitability : 267.2445

&#61607; Regression measures

This measure is determined by Regression Line equation which is given by:

Net profit ($m), Y = -160.0836+0.1927*Sales($m)

Net Profit (Y) is a dependent variable whereas Sales is an independent variable. The forecasted value of sales for the year 2008 is being put into this formula to calculate the net profit

&#61607; Statistics

The statistics is obtained by determining:

1) Correlation of Coefficient (r)

Correlation of coefficient (r) is a measure of the strength of relationship between the two variables. This normally varies from -1 to +1. This measure expresses the degree or strength of the linear relationship between the two variables. The correlation of coefficient for profitability (r) is = 0.4529 which indicates that it is not a significant correlation and it confirms that the two variables are not closely related which is clearly indicated by the graph.

2) Correlation of determination (r^2)

Correlation of determination (r^2) is the percentage (%) of variation in the dependent variable that is explained by the regression equation. This normally varies from 0 to +1. The correlation of determination for profitability (r^2) is = 0.2051 indicating that only 20.51% of the total variation (in the dependent