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How do analysts predict a company's earnings? We're going to walk you through the how. You might even be surprised at how similar this all is to the way you project your own finances.

Imagine you get a new job, it pays really nicely and you move into a better apartment. Okay, well, how much are you getting per year? What's your new tax rate? What's your annual after tax income? How much is the new rent? What are you left with after rent, health insurance, food each month, going out with friends, all that. Sorry to pry. Don't worry. I'm indeed not going to ask you for your social security number. The point is that the way analysts projected earnings is similar in some ways. For revenue projections, let's say it's a food chain, analysts must ask 'how many sandwhichs will the company sell in the next year? At what average selling price ASP will these sales happen?' Volume times price equals revenue. Analysts are in contact with company management to get an idea of what the pricing and market strategies is, they survey customers, they read industry reports on how big the total market is for this type of food and when they think they have an idea, we think this company can take x percent market share of the total market worth y.

Here's the revenue estimate. Now the costs, what's the cost of revenue or cost of goods sold? How much does it cost to buy the chicken, buy the bread, the sauce? What does it cost to put the sandwich together? For this, the analyst is talking to suppliers, reading industry reports on the relevant commodity markets, chickens, wheat, etc. for this company, revenue minus cost of goods sold equals gross profits. Let's say the company's expanding into a new country to increase those sales volumes and needs to compete with the local food companies. How much will marketing and advertising spend be? How many new employees does the company to hire? Are wages going up? What's the amount that company needs to spend on wages and selling General Administrative SGNA? After all these operating costs, we get to operating profit. Then how many dollars of interest expense is there? Most companies borrow from lenders

of course. After all these costs, the company's taxed. What's the tax rate? President Trump lowered it from 35% to 21% so 21% of this profit goes to the government as a tax. Now we're at net income. That income is earnings. Earnings is net income, for this one year the analyst has arrived at his or her earnings projection. Now you try it. It's going to take a lot of time, and since you probably can't get in contact with the CEO of Chipotle or Starbucks or McDonald's, go read those companies earnings transcripts, see how you stack up against Wall Street.

So how do analysts arrive at those numbers, projecting companies' profits? 

We're going to walk you through the 'how' in our TheStreet Explains series, and you might even be surprised as to how similar this all is to the way you project your own finances. 

Imagine you get a new job. It pays really nicely. You move into a better apartment. 

Here's some questions you may be asking yourself:

How much are you getting per year?

What's your new tax rate?

What's your annual after-tax income?

How much is the new rent?

What are you left with after rent, health insurance, food yeah month, going out with friends? 

The point is that the way analysts project earnings is similar to the way you project your own earnings. 

Watch the video above to get the full explainer and more.

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