Company Analysis: Past, Present, and Future: formula sheet

Key formulas

Three time frames of analysis

Past performance + Present position + Future outlook = basis for valuation

Past uses financial statements, present uses business and competitive review, future uses forecasts.

Business model questions

Who are the customers? What is sold? How is revenue earned? What are the costs? Why can the firm win?

Use this checklist to classify any description in a vignette.

Typical elements of a company analysis report

Company description → industry → thesis → financials → forecasts → valuation → risks → governance/ESG

Order varies by report. The exam tests the content of each element, not a fixed order.

Link between strategy and results

Competitive advantage → sustained margins and returns above peers

A claimed advantage should show up in financial results over time. If it does not, question it.

Porter's five forces

New entrants + Suppliers + Buyers + Substitutes + Rivalry

Stronger forces mean lower industry profit potential. Weaker forces mean higher potential.

Industry life cycle stages

Embryonic → Growth → Shakeout → Mature → Decline

Know growth, pricing, margins and risk at each stage. Not every industry follows the sequence.

Generic strategies

Cost leadership | Differentiation | Focus (cost or differentiation)

Cost leaders win on low cost. Differentiators win on a price premium. Focus targets a narrow segment.

Cost leadership profit logic

Profit per unit = Price − Unit cost

A cost leader can earn a profit at a price where higher-cost rivals cannot.

Net profit margin

Net profit margin = Net income ÷ Revenue

Compare over time and with peers. Look at gross and operating margins too to locate where changes arise.

Three-step DuPont

ROE = (Net income ÷ Revenue) × (Revenue ÷ Average total assets) × (Average total assets ÷ Average equity)

Margin × asset turnover × financial leverage. Shows whether ROE comes from profitability, efficiency or debt.

Cash flow to income (accrual check)

CFO ÷ Net income

A persistently low or falling ratio can signal low-quality earnings. It is a warning sign, not proof of manipulation.

Cash-flow-statement accruals ratio

Accruals ratio = (Net income − CFO − CFI) ÷ Average net operating assets

Net operating assets = operating assets minus operating liabilities. A common way to measure them is (total assets − cash and marketable securities) − (total liabilities − total debt). Average them over the period. CFI is subtracted as a proxy for operating-related investment outflows. Cash spent on long-term operating assets such as equipment shows up as negative CFI, so subtracting it counts that spending as investment in net operating assets. This assumes most investing cash flow relates to operations. Higher accruals can signal lower earnings quality. This is a warning sign, not proof. Direction and trend matter more than one value.

Balance-sheet accruals ratio

Accruals ratio = (Ending net operating assets − Beginning net operating assets) ÷ Average net operating assets

The balance-sheet version of the same idea. It measures growth in net operating assets relative to their average size. Read it the same way: higher values are a warning sign, not proof.

Segment margin

Segment operating margin = Segment operating profit ÷ Segment revenue

Also compute each segment's share of total revenue and profit to see where value is created.

Growth rate

Growth = (Current value ÷ Prior value) − 1

Use consistent periods. For multi-year growth use the compound annual rate.

Top-down revenue

Company revenue = Industry (or market) sales × Market share

Market share is the company's share of the industry. The industry figure may come from GDP growth times a growth multiplier.

Bottom-up revenue

Revenue = Σ (units × price) across products, segments or locations

Add up all segments. Check that the total implies a believable market share.

Revenue growth

Revenue(t) = Revenue(t−1) × (1 + g)

Use for a simple growth-rate forecast. g is the expected growth rate.

Degree of operating leverage

DOL = % change in operating income ÷ % change in sales

Higher fixed costs give higher DOL, so profit swings more than sales.

Probability-weighted value

Expected value = Σ (probability × value in scenario)

Probabilities across scenarios must sum to 1.

Pro forma balance check

Assets = Liabilities + Equity

Financing, often cash or debt, is the plug that makes the forecast balance.

Materiality test

Include an ESG factor if it can change a company's cash flows, risk or cost of capital

Materiality is specific to the company and industry, not the same for all firms.

Where ESG enters valuation

Value = f(forecast cash flows, discount rate, terminal value/multiple)

Adjust one or more inputs, using scenarios. Avoid counting the same risk twice.

ESG integration vs other approaches

Integration = material ESG factors inside normal analysis; screening = exclude by rule; thematic = focus on a theme

Do not mix these definitions in exam answers.

Quick revision

• A business model explains who the customers are, how the firm earns revenue, and what costs and capital it needs.
• Strong industry structure and a durable competitive advantage support higher and more lasting returns.
• Strategy should fit the industry: cost leadership and differentiation are different routes to an advantage.
• When analysing past results, explain the driver behind each change, not just the direction.
• Compare a firm with its own history and with peers, using the same definitions and periods.
• Forecasts should start from drivers such as volume, price, margins and investment, and stay consistent with each other.
• Be careful with forecasts that assume margins or growth far from history without a stated reason.
• Sensitivity or scenario analysis shows how much a conclusion depends on a key assumption.
• Good governance means effective oversight, aligned incentives and fair treatment of shareholders.
• ESG factors can affect risk, cash flows and cost of capital, so analysts consider them in valuation.
• On exam day, eliminate two options, pick the best answer and never leave a question blank.

Common mistakes

• Treating the business model as the same as the financial statements. Fix: Remember that the model explains how value is created. Statements show the results. Use both, in that order.
• Assuming a competitive advantage lasts forever. Fix: Ask what could erode it: new entrants, technology, regulation. Forecasts should reflect fading advantage where relevant.
• Treating high industry growth as proof of high profit. Fix: Growth attracts entrants and rivalry. Judge profit through the five forces, not growth alone.
• Confusing buyer power with supplier power. Fix: Ask who is on the other side of the firm. Customers are buyers. Input providers are suppliers.
• Treating a high ROE as good without looking at leverage Fix: Run the DuPont split. If ROE rose only because of leverage, risk rose too.
• Concluding earnings are manipulated because CFO is below net income Fix: Say it raises a question. Growth, timing and working capital can explain gaps; look at the trend.
• Calling a method top-down because it uses macro data anywhere. Fix: Look at where the forecast starts and where it ends. Top-down starts broad and narrows to the firm. Bottom-up starts at the firm.
• Treating sensitivity and scenario analysis as the same thing. Fix: Sensitivity varies one input at a time. Scenario varies several inputs together in a consistent set, often with probabilities.
• Treating all ESG factors as equally important for every company Fix: Always ask which factors are material for that business and why.
• Confusing ESG integration with exclusionary screening Fix: Integration adjusts the analysis; screening removes sectors or names by rule.

Exam tips

• Expect short vignettes that describe a business and ask you to name the feature, such as switching costs, scale or a revenue model.
• Match the fact to the correct element of the analysis before looking at options. This removes two options quickly.
• Be wary of options that claim an advantage is permanent or guaranteed.
• Where the stem gives both a strategy claim and financial data, choose the option consistent with both.
• Always state the effect on profit: strong forces lower it, weak forces raise it.
• Link life cycle stage to clues: price wars and failures mean shakeout, steady cash flow means mature.
• Separate the source of advantage: lower cost means cost leadership, a premium for uniqueness means differentiation.
• Watch for stems that include the word 'substitutes'. Substitutes come from different industries, while rivals come from the same one.