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I assume that if one was a careful study of a company, you could determine revenue by surveying consumers and determining how much inventory is being sold, but I don't see how an analyst could gain insight into the costs of a company, especially a small growth company.

For example, a small company might only have a few million in profit, but could easily eliminate this profit by hiring a few dozen more employees. Do analysts have access to insider knowledge from the company board?

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First, you should know that analysts aren't always right. Estimates are called estimates for a reason, they are ESTIMATES! Analysts have access to about the same information as everyone else has. With that being said, their estimates reflect the present value of future earnings (and when I say future, I do not mean one year in the future where just about anything can happen).

For example, take a small company that makes $1 million annually. The company decides to hire some people to drive company growth, and so their SG&A goes to $1 million, and so the company is left with $0 in profits. Does this mean that the company is worth $0? No! In fact, an analyst might see the $0 in profits as a good thing, because they know with more people, the company may make $100 million in the future! Remember the value of any given company is based on future earnings.

  • My question wasn't asking if analysts are right or wrong, but how they make their estimates. This "same information as everyone else has" is called what? Guidance? – Rich Mar 5 '14 at 2:30
  • I am not quite sure what you are asking. The same information would be the earnings reports, conference calls etc. Obviously analysts might do their own research, but the "frame" of the research is accessible to anybody. – user2608474 Mar 5 '14 at 3:24

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