What is a 'Consensus Estimate'

A consensus estimate is a figure based on the combined estimates of analysts covering a public company. Generally, analysts give a consensus for a company's earnings per share (EPS) and revenue; these figures are most often made for the quarter, fiscal year, and next fiscal year. The size of the company and the number of analysts covering it will dictate the size of the pool from which the estimate is derived.

BREAKING DOWN 'Consensus Estimate'

When you hear that a company has "missed estimates" or "beaten estimates," these are references to consensus estimates. Based on projections, models, sentiments and research, analysts strive to come up with an estimate of what the company will do in the future. Consensus estimates can be found in stock quotations or summaries in common places, such as the Wall Street Journal’s website, Bloomberg, Morningstar.com, and Google Finance, among other locations.

Consensus Estimates and Market (In)Efficiencies

Consensus estimates, comprised of individual analyst assessments, are not an exact science. All reports rely not only on financial statements (i.e. the Statement of Financial Position or Balance Sheet; Statement of Comprehensive Income or Income Statement; Statement of Changes in Equity; and Statement of Cash Flows), which may be manipulated by management or other staff, with access to company records – they also involve inputs, such as footnotes, management commentary, research into the industry overall, peer companies, and macroeconomic analysis.

Analysts will often use inputs from the above data sources and place them into a Discounted Cash Flows model (DCF). The DCF is a method of valuation, which uses future free cash flow projections and discounts them, using a required annual rate, to arrive at a present value estimate. If the present value arrived at is higher than the current market price of the stock, an analyst may come in “above” consensus. In contrast, if the present value of future cash flows is lower than the price of the stock at the time of calculation – an analyst may conclude that the stock is priced “below” consensus.

All of this leads some pundits to believe that the market is not as efficient as often purported, and that the efficiency is driven by estimates about a multitude of future events that may not be accurate. This might help to explain why a company's stock quickly adjusts to the new information, provided by quarterly earnings and revenue numbers, when these figures diverge from the consensus estimate.

RELATED TERMS
  1. Earnings Estimate

    An earnings estimate is an analyst's estimate for a company's ...
  2. Earnings Surprise

    An earnings surprise occurs when a company's reported quarterly ...
  3. Common Size Financial Statement

    A common size financial statement allows for easy analysis between ...
  4. Comparative Statement

    A comparative statement is a document that compares a particular ...
  5. Absolute Value

    Absolute value is a business valuation method that uses discounted ...
  6. Relative Value

    Relative value is a method of determining an asset or company's ...
Related Articles
  1. Investing

    Top 3 Pitfalls Of Discounted Cash Flow Analysis

    Find out why the Discounted Cash Flow (DCF) method can be difficult to apply to real-life valuations.
  2. Personal Finance

    Discounted cash flows or comparables: Which to use

    DCF and comparables models are widely used in equity valuation, and here we'll explain the pros and cons of each method.
  3. Investing

    Strategies For Quarterly Earnings Season

    Breeze through consensus estimates like the biggest Wall Street forecasters.
  4. Investing

    Corporate Cash Flow: Understanding the Essentials

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself. Learn how to read the cash flow statement.
  5. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  6. Investing

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  7. Investing

    Cash flow statement: Analyzing cash flow from financing activities

    The financing activity in the cash flow statement measures the flow of cash between a firm and its owners and creditors.
  8. Investing

    Cash flow statements: Reviewing cash flow from operations

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods for calculating it.
RELATED FAQS
  1. What is the difference between a cash flow statement and an income statement?

    Learn how a cash flow statement measures the sources and uses of a company's cash, while an income statement measures a company's ... Read Answer >>
  2. How are cash purchases recorded on a company's income statement?

    Take a deeper look at the treatment of cash payments on a company's financial statements, including how specific purchases ... Read Answer >>
  3. How do the balance sheet and cash flow statement differ?

    The balance sheet and cash flow statement are financial statements that companies issue to report their financial performance ... Read Answer >>
  4. When and why should the terminal value be discounted?

    Find out why investors use the terminal value, why the terminal value is discounted to the present day, and how it's related ... Read Answer >>
Trading Center