Equity research

Building an earnings model

Forecast a listed company's EPS from segment volumes, prices and margins, down to net income and per-share earnings.

35 minintermediateFree lesson

Learning objectives

Forecast segment revenue from volume and price drivers and segment EBIT from margins
Bridge from segment EBIT to net income and diluted EPS
Separate operating EPS growth from growth that comes from a falling share count

An equity analyst's forecast is judged on one number above all: earnings per share (EPS). The market compares it with consensus, and P/E valuations multiply it. A credible EPS forecast is built bottom-up, from the drivers management and investors can debate: how many tonnes each business sells, at what price, at what margin.

This lesson builds that model for Bustan Foods Co., with two segments (dairy and bakery), central costs, interest, tax and a share count reduced by buybacks. Bustan Foods Co. is a fictional listed food producer, and its share prices, the market index and all other figures are invented for teaching. Examples are educational and illustrative, not investment advice.

From segment drivers to EPS

Segment revenue = volume × price · Segment EBIT = revenue × margin · EBIT = Σ segment EBIT − central costs · EPS = (EBIT − net interest) × (1 − tax rate) ÷ diluted shares

Volume, price: each grown separately: volumeₜ = volumeₜ₋₁ × (1 + volume growth), likewise price
Central costs: head-office costs not allocated to segments
Diluted shares: weighted average shares including dilutive options; buybacks reduce it

Bustan Foods Co. FY2025A by segment (SAR m, fictional)RevenueSegment EBIT

Data

	Revenue	Segment EBIT
Dairy	966	116
Bakery	480	43

Why build from drivers? A forecast that simply grows last year's EPS by a percentage hides every judgement inside one number. Splitting it into volume, price and margin by segment lets you test each assumption against evidence — capacity, market share, pricing power, input costs — and lets a colleague disagree with a specific line rather than with the answer.

A step-by-step method. (1) Start from the last reported year and check that your build reproduces its EPS, as the worked example does. (2) Grow volume and price separately for each segment; they compound, so dairy revenue growth in FY2026E is (1 + 3.0%) × (1 + 2.0%) − 1 = 5.06%, not 5.00%. (3) Apply each segment's own margin. (4) Deduct central costs, then interest, then tax. (5) Divide by the diluted share count for that year.

Find the assumptions that matter. Once the model works, flex one input at a time. On the FY2025A base, one percentage point of dairy EBIT margin is worth SAR 966.0m of dairy revenue ×1% × (1 − 20%) ÷ 50.0m shares = SAR 0.155 of EPS, about 9.7% of the total. That tells you where to spend your research time.

Limits. The model is only as good as its drivers, and small margin changes move EPS a lot. Compare your result with history and, where available, with other analysts' forecasts; if you are far from both, be able to say which assumption explains the gap. The next lesson turns this EPS forecast into a valuation with the P/E ratio.

Calculation

Exercise 1

Calculate

A fictional company's segments earn total EBIT of SAR 180m. Central costs are SAR 30m, net interest SAR 25m, the tax rate 20%, and diluted shares 80m. What is EPS, in SAR? (Two decimals.)

Your answer

Concept check

Exercise 2

Check your understanding

A company's net income grows 3%, but EPS grows 7.9%. What explains the gap, and what should an analyst conclude?

Buybacks cut the diluted share count by 4.6%. Operating growth is only 3%; the rest depends on how the buyback was funded and priced.Margins expanded, so the business improved more than net income shows.EPS growth is always higher than net income growth because of compounding.The tax rate fell.

Model · 3 tabs

Exercise 3

Challenge: Bustan's EPS forecast

Build Bustan's earnings model for FY2025A–FY2028E from the Inputs tab.

Segments: volume and price for each segment (FY2025A linked from Inputs, then grown by each year's growth rate), revenue = volume × price, segment EBIT = revenue × that year's margin, then group revenue and total segment EBIT.
Earnings: central costs (FY2025A linked, then grown), EBIT, profit before tax, tax, net income, EPS, EPS growth, and the three-year EPS CAGR in B15.

Revenue, segment EBIT, interest and shares are already linked into the Earnings tab.

0/68 cells entered · Ctrl+. jumps to the next empty cell

Inputs!A1

FY2025A actuals and FY2026E–FY2028E assumptions. Blue cells are inputs; the other tabs read them from here.

	A	B	C	D	E
1	Bustan Foods (fictional)	FY2025A	FY2026E	FY2027E	FY2028E
2	Dairy volume (k tonnes)	210.0
3	Dairy volume growth		3.0%	3.0%	2.5%
4	Dairy price (SAR '000 per tonne)	4.60
5	Dairy price growth		2.0%	2.0%	2.0%
6	Dairy EBIT margin	12.0%	12.0%	12.1%	12.2%
7	Bakery volume (k tonnes)	150.0
8	Bakery volume growth		6.0%	5.0%	5.0%
9	Bakery price (SAR '000 per tonne)	3.20
10	Bakery price growth		1.5%	1.5%	1.5%
11	Bakery EBIT margin	9.0%	9.2%	9.4%	9.6%
12	Central costs (SAR m)	38.0
13	Central cost growth		3.0%	3.0%	3.0%
14	Net interest expense (SAR m)	22.0	22.0	21.5	21.0
15	Tax rate	20.0%	20.0%	20.0%	20.0%
16	Diluted shares (m)	50.0	49.8	49.6	49.4

InputYou build (dashed while empty)Given, lockedBustan Foods (fictional)

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