Learn how Series 86 tests working-capital forecasts, capex, sources and uses of cash, three-statement reconciliation, sensitivity analysis, scenarios, and model updates.
Series 86 forecasting does not stop at the income statement. A research model also needs cash-flow logic, balance-sheet support, and internal consistency. A forecast that raises revenue without considering working capital, capex, funding, leverage, or capacity can produce a valuation that looks precise but rests on an impossible operating plan.
This section tests model integrity. The analyst must connect growth assumptions to the cash and balance-sheet resources needed to support them, then update the model as new evidence arrives. A strong Series 86 answer usually identifies which assumption is inconsistent, unsupported, or most sensitive to change.
| Model area | What to forecast | Series 86 reason |
|---|---|---|
| Working capital | receivables, inventory, payables, and timing patterns | translates sales growth into operating cash-flow impact |
| Capex | maintenance versus growth spending | tests whether capacity and asset base support the revenue plan |
| Sources and uses | operating, investing, and financing cash flows | shows how cash moves through the model |
| Balance sheet | cash, debt, equity, and invested capital | keeps funding and leverage plausible |
| Leverage metrics | net debt/EBITDA and coverage-related outputs | checks downside risk and financing flexibility |
| Model reconciliation | change in cash and statement linkages | detects broken or unrealistic assumptions |
Series 86 often tests whether the analyst recognizes that growth consumes resources. Higher revenue may require more inventory, more receivables, more capex, more working capital financing, or additional debt. A capacity-constrained company cannot usually grow materially without investment. A seasonal business may need inventory builds and short-term funding before sales arrive.
The stronger answer connects the forecast to operating reality. If the business needs new facilities, the model should reflect capex and depreciation. If the company sells on credit, receivable growth should follow sales and collection assumptions. If inflation affects input costs, inventory and gross margin assumptions should be reviewed together.
A research model should show which assumptions matter most. Sensitivity analysis tests one or more key drivers, such as price, volume, margin, WACC, terminal growth, capex, or working capital. Scenario analysis groups assumptions into coherent base, bull, and bear cases. A bear case should not merely lower the price target; it should explain which business drivers deteriorate.
Series 86 rewards scenario logic that is tied to evidence. A cyclical company may need a bear case with lower volume, weaker margins, and tighter credit. A growth company may need a bear case with slower customer additions, higher churn, and weaker operating leverage. The right scenario depends on the company’s actual risk exposures.
Forecasts should be revised when the facts change. New earnings, guidance revisions, macro shifts, competitor actions, regulatory developments, demand signals, and cost data can all trigger updates. The analyst should distinguish short-term timing changes from long-term thesis changes. A delayed shipment may shift revenue between quarters. A permanent demand slowdown may change the valuation range.
A good model includes an assumption table that links major inputs to sources: company filings, management guidance, peer data, industry data, macro indicators, or analyst estimates. That documentation makes the next update faster and helps prevent silent drift from evidence-based assumptions into unsupported numbers.
An analyst raises volume growth materially for a capacity-constrained manufacturer but leaves capex, inventory, and debt assumptions unchanged. What is the strongest Series 86 concern?
A. The model may be internally inconsistent because higher volume may require capacity investment, working capital, and financing support B. There is no concern because volume is an income statement item only C. The analyst should ignore the balance sheet until after the price target is set D. Higher volume always lowers leverage regardless of funding needs
Answer: A. Series 86 expects growth assumptions to be supported by the cash-flow and balance-sheet resources needed to make the forecast plausible.