The biggest assumption and risk for investors: Earning Forecast

The biggest assumption in any valuation model is the earning forecast.

We have assumed that the earning forecasts by various analysts are good and accurate. This is the biggest risk investors have to face.

In general, investors can use consensus earning forecasts for computing the valuation, however, through experience, investors can identify good analysts from not so good ones, and hence, can be selective in using the earning forecast data.

Bear in mind that a way-off-earning forecast (especially over-bullish) could have disastrous effects on the stock price once the actual result is announced.

A good practice is to compare the forecast EPS growth rate with the averge EPS growth rate in the past three years and see whether the forecast EPS growth rate is in line with the historical numbers.

In short, what investors are looking for is an accurate EPS growth forecast.