How do financial analysts typically verify their assumptions?

Financial analysts typically verify their assumptions through a sanity check against reasonable benchmarks. This involves testing the assumptions against logical expectations and established standards to ensure that they are realistic and plausible. Sanity checks help analysts confirm that their projections and forecasts are aligned with industry norms and trends. By applying this method, analysts can catch potential errors or overly optimistic projections early in the process.

While examining past data, peer group benchmarks, and conducting market assessments are also valuable methods used by analysts, they serve different purposes. Historical data can provide context and a basis for trend analysis, peer group benchmarks allow for comparison with similar entities to gauge performance, and market assessments help analysts understand broader economic and competitive factors at play. However, the concept of a sanity check is specifically focused on evaluating whether the assumptions are sound and reasonable on their own merits before further analysis is conducted. This step is crucial in ensuring the integrity and reliability of the financial models being created.