Key insights
- The analyst is deciding whether to use 2020 or 2021 EBIT as the base for a DCF model, given COVID-related distortions. Using 2020, the last 'normal' year, is suggested as a better reflection of long-term earning power. Alternatively, 2021 could be used with adjustments for one-off events and a higher growth rate to account for pandemic recovery. The choice impacts the initial EBIT and subsequent growth assumptions in the DCF.
Ive got a case study, however the most recent year has been distorted with covid. Ive got to derive my initial EBIT, I am deciding to either anchor 2020 or 2021. 2021 is distorted with covid, it's much lower than the others. 2020 is the last "normal" operating year.
Logically I am thinking of going with 2020 as 2021 does not realistically give me an insight of the long term earning power of the firm. Am I correct on this logic? Otherwise 2021 would also make sense as its most recent, however my growth rate would need to be quite higher as it would include the end of pandemic. I would also need to remove all the big once off events (impairment of goodwill, etc etc)