What is a common approach to forecasting cash flows?

Using historical growth rates as a basis for future projections is a common and established approach to forecasting cash flows. This method relies on the assumption that past performance can provide insights into future trends. When analysts examine historical data, such as revenue and cash flow growth rates, they can identify patterns that may continue, assuming no significant changes in the business environment or operations.

This approach is grounded in the idea that the underlying drivers of company performance, such as market demand, competitive advantage, and operational efficiency, are often relatively stable over time. Therefore, analysts often take the average historical growth rates and adjust them for anticipated changes in the company's strategy, market conditions, or economic environment.

By leveraging historical trends, analysts can create more informed and realistic forecasts, reducing the inherent uncertainty associated with projecting future cash flows. This methodology is seen as more reliable than relying exclusively on arbitrary growth rates, which may not reflect the actual performance or the realities of the market.