30 SECOND GUIDE: Profit forecasts

By THIS IS MONEY REPORTER
Updated: 03:52 EST, 21 September 2011

The Daily Mail City team explains the art of predicting how much a company is going to earn.

What are they?

Like weathermen, chief executives like to think they can see into the future. Depending on whether they perceive squalls or sunshine ahead, they’ll set their dials accordingly and either cut or raise their earnings forecasts.

Sunshine ahead? Department store Debenhams upped its earnings outlook for this year. It claims to be outperforming its High Street rivals

How do they do it?

There’s more art than science to testing the profit runes. Somewhat counter-intuitively, department store Debenhams upped its earnings outlook for this year. It claims to be outperforming its High Street rivals.

How can they tell?

By looking at what their competitors do and drawing on the experience of the past, executives can make guess as to how much cash will be in the coffers by year end. Unforeseen events can up-end the most stringently assembled targets.

Go on

From retailers to technology firms, it is the broader economic trends that often determine the amount of profit a company generates. As we’ve seen over the past couple of months, what once looked like a sustainable recovery can swiftly turn into a nasty slowdown. Others, though, are more resilient.

Who?

An engineer like Rolls-Royce has an order book that stretches years ahead, which makes it easier to predict future profits.