Performing Sensitivity Analysis

in Excel
To better understand how Sensitivity Analysis can improve our
financial models, let us look at one of the most common ways to apply
it.

We are valuing a potential investment in a company with the following

historical data for the past three years:

We have also made the following assumptions for our model:

Applying the assumptions for Revenue Growth, COGS Percentage,

and SG&A Percentage, we can build a simple forecast for the next
five years.
Assuming no Capex and the following Net Working Capital changes,
we arrive at the resulting Free Cash Flow for the five years.

We also add another Exit period for the terminal value, that we can
calculate based on last period EBITDA and the EBITDA multiple from
the assumptions we made earlier.

We can then use the XNPV formula in Excel to calculate the Net
Present Value of the Free Cash Flow for the period.

Taking the NPV of our forecasted cash flows as the Enterprise Value,
we can add cash and subtract debt to arrive at the Equity Value.
Dividing this over the 12,500 outstanding shares, we arrive at an
Equity Value per Share of EUR 6.26 thousand.
Let us prepare a table for our sensitivity analysis. We will be looking
into how changes in EBITDA multiple and Revenue Growth will affect
the share price calculation.

After we have the table set-up in this way, with the calculated Share
Price linked in the top-left cell, we can use the Data Table functionality
of Excel, under the Data tab, in the What-If Analysis drop-down.

To learn more about the Data Table functionality, please refer to this
page: Calculate multiple results by using a data table.

Basically the idea is that we select the two input variables (growth rate
of revenue and EBITDA multiple), and the data table calculates the
output variable (share price) per each combination of values of the
input variables.
Having this table, we can then perform a much more thorough
analysis and support a better decision-making process. It is
instrumental to analyze how the share price of the potential
investment will be affected by possible changes in revenue growth
and the exit EBITDA multiple. Being able to provide ranges for the
independent variables, within which we can expect a positive return
will ultimately aid us in making a more informed decision.

Conclusion
Sensitivity analysis is an instrumental tool in the arsenal of any
financial analyst. It provides insights into the problems with the model.
It also gives us an idea about how sensitive is the optimum solution
chosen to variations in the input values of one or more independent
variables.