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What Is a Consensus Estimate?

Alex Newth
Alex Newth

A consensus estimate is an estimate of how much a business will be worth in the future based on several aspects, some solid and some assumed. This often is performed per quarter and per year, and it normally is done to see how the company is doing and to try to boost stock prices. Many analysts are commonly used, and their estimates are averaged together for the entire consensus estimate. Factors used to get this estimate include stock price, opinions and financial projections, among other factors. A problem with using this estimation method is that it is rarely accurate, because the business and analysts do not know what is really going to happen in the future.

When a consensus estimate is performed, it normally is done for the quarter, year or both. One reason for doing this is so the business knows how it is doing based on these estimates; for example, a low estimate may show the business that something is wrong with one of the estimation factors, and the business can then attempt to fix it for a better estimation or outcome. Another reason for this is that stock prices may temporarily increase if the estimate is high, and this can bring in more money from investors.

Man climbing a rope
Man climbing a rope

A single analyst rarely performs this type of estimate, even if a small business is being evaluated. Each analyst will either look at one factor of the business or each will look at the business as a whole and come up with a full estimate. If the former, then all the estimates are added together to get the consensus estimate; if the latter, then the estimates are averaged and that average becomes the consensus.

Many factors are used to analyze a business’s future income. Some solid information that can be quantified includes current stock price, financial projections and the current rise of growth. One aspect that is typically less reliable is opinion, such as how much money an analyst thinks a new product will bring in for the business.

Future events typically do not exactly follow estimates and models, so a consensus estimate is rarely accurate. This can cause a mass shifting of the business’s stock prices, and it may even cause public distrust in the company if the consensus estimate is much higher than the business’s current revenue. When real financial reports come out and investors review them, stock prices typically will rise or lower depending on those more accurate figures.

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