Fundamental Analysis For Dummies, 2nd Edition
Book image
Explore Book Buy On Amazon
One technique used in long-term forecasts in fundamental analysis is the moving average. With this analysis, investors attempt to smooth out unusual bumps in a company's results. A moving average serves the same role as your seatbelt when your airplane hits turbulence.

Moving averages may be applied to annual results or to quarterly results, based on how volatile the company's profits are.

To conduct a moving-average analysis, you first must choose how many years you want to incorporate. A common time period would be three years. You add up the company's results over three-year chunks and then divide by the number of years, or 3. The table shows you what a three-year moving-average analysis on Oracle's operating income would look like.
Getting a Move On With Oracle
Fiscal year ended Three-year operating-income moving average at the end of . . . (in $ millions)
2011 $10,383
2012 $12,217
2013 $13,739
2014 $14,491
2015 $14,568
Using this analysis, you can see that the company's compound average annual growth rate is now really starting to slow down. Oracle's compound average growth rate based on five moving-average periods is 8.8 percent. That might be a reasonable basis with which to make a forward-looking growth forecast.

About This Article

This article is from the book:

About the book author:

Matt Krantz, a nationally known financial journalist, has been writing for USA Today since 1999. He covers financial markets and Wall Street, concentrating on developments affecting individual investors and their portfolios. Matt also writes a daily online investing column called "Ask Matt," which appears every trading day at USATODAY.com.

This article can be found in the category: