Company：American Ailines Group

Estimating Earnings and Cash Flows
Objective: To estimate earnings and cash flows on a typical project for the firm.
Key Steps: 1. Model a typical investment for the company, with the intent of understanding the
cash flow patterns and risks in the investment.
2. Develop investment decision rules that make the most sense for the company, given
its profile (capital constraints, size, and ownership structure) and the nature of its
projects.
Framework
For Analysis: 1. Typical investment
a. Model a typical investment for the company in terms of how long it lasts and what
the cash flows look like over time. If the company is in more than one business or
more than one type of investment, look at differences across businesses and
investments.
b. List out the sources of variability in the cash flows on a typical project and tie it
back to risk measures used for the company.
2. Investment decision rule
a. Evaluate the ease with which your company can access new capital, either from
markets (stock and bond) or banks. If the company has a capital constraint,
examine whether that constraint comes from internal or external factors and
whether is likely to remain, get more stringent or relax over time.
b. Given the profile of your typical projects and the status of the company, look at
the investment decisions rule(s) that make the most sense for your company:
earnings versus cash flows, time weighting versus averaging, and scaled for size
(percentage returns) or unscaled (absolute returns).
Getting
Information
On Projects: Firms describe their investments, though not in significant detail, in their annual reports.
The statement of cash flows will provide some breakdown, as will the footnotes to the
financial statements. Bloomberg and Thomson Reuters in the FSIT lab and investor
websites also may provide additional insights.