Equity Analyst Research Reports: formula sheet

Key formulas

Typical report sections

Summary and rating → Thesis → Business and industry → Forecasts → Valuation → Risks → Disclosures

Order and labels vary by firm. Know the purpose of each section, not a fixed sequence.

Expected return to target price

Expected price return = (Target price − Current price) ÷ Current price

Add expected dividends if the question asks for total return. Ratings are often linked to this figure, but the rating scale is set by the firm.

Standard V(B) core duty

Disclose the investment process; separate fact from opinion; include important factors

Use this to judge whether a report communicates properly. Report format is not prescribed.

Expected price return to target

Expected price return = (Price target − Current price) ÷ Current price

Compare this with the firm's rating bands. Add expected dividends for a total return view.

Expected total return

Expected total return = (Price target − Current price + Dividends) ÷ Current price

Use it when the question mentions dividends over the horizon.

Target price from a multiple

Price target = Target P/E × Forecast EPS

The EPS must be for the period the multiple applies to, such as forward EPS at the horizon.

Intrinsic value vs market price

Intrinsic value > price: undervalued. Intrinsic value < price: overvalued.

This is the logic behind a buy or sell rating. Rating bands vary by firm.

Rolling value forward

Value at horizon ≈ Value today × (1 + required return) − Dividends paid

A simple way to link today's intrinsic value to a 12-month target. Use it only if the question points to this logic.

Top-down forecast of company revenue

Company revenue = Industry revenue × Market share

Start from the industry or economy, then apply the company's expected share.

Bottom-up forecast of company revenue

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

Build from company-level drivers and add them up.

Justified value from a multiple

Value per share = Target multiple × Forecast metric per share

Example: forecast EPS × target P/E. The multiple should come from comparable firms or history.

Upside to price target

Expected return = (Target price − Current price) ÷ Current price

Compare with the rating scale to see whether Buy, Hold or Sell fits. Add dividends if the report includes them.

Probability-weighted value

Expected value = Σ (probability of scenario × value in scenario)

Probabilities must add up to 100%.

Standard I(B): Independence and Objectivity

Use reasonable care and judgment to achieve and maintain independence and objectivity

Do not offer, solicit or accept gifts, benefits or compensation that could reasonably be expected to compromise your own or your employer's independence and objectivity.

Standard V(A): Diligence and Reasonable Basis

Exercise diligence, independence and thoroughness; have a reasonable and adequate basis supported by research and investigation

Applies to analysis, recommendations and actions. Third-party research needs a check on its quality.

Standard V(B): Communication with Clients

Use reasonable judgment in identifying which factors are important to investment analyses, recommendations or actions, and include those factors in communications with clients; distinguish fact from opinion

Clients must receive the important factors behind a recommendation, including significant limitations and risks of the analysis.

Standard VI(A): Disclosure of Conflicts

Make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity

Disclosure must be prominent, plain and clear. VI(A) requires disclosure. Avoiding compromising gifts or compensation comes from I(B).

Standard V(C): Record Retention

Develop and maintain records that support investment analysis, recommendations, actions and communications

Records are firm property. Keep them for the period your firm or law requires.

Quick revision

• A research report informs investors and supports a decision; it is not a promise of returns.
• Typical parts: summary and recommendation, thesis, business and industry, forecasts, valuation, risks, disclosures.
• The thesis is the core reason the market price is wrong or the stock is attractive.
• The rating must follow from the valuation and the thesis, not be stated on its own.
• Forecasts should rest on clear, stated assumptions about revenue, margins and capital needs.
• Valuation should explain the method chosen and why it suits the company.
• Risk analysis should say what could make the thesis fail, not just list generic risks.
• Good research is clear, well supported, balanced, and uses up-to-date information.
• Conflicts of interest must be disclosed, including holdings and investment banking relationships.
• Independence and objectivity means the analyst is not pressured by the company or the employer to give a favourable view.
• A recommendation needs a reasonable basis and should be backed by documented work.
• On the exam, eliminate options that ignore evidence, hide conflicts, or give a rating unsupported by valuation.

Common mistakes

• Treating the rating as the whole report Fix: Remember the value is in the reasoning. The thesis, assumptions and valuation justify the rating.
• Confusing thesis with valuation Fix: The thesis says why the market may be wrong. The valuation puts a number on value using stated models and inputs.
• Treating price target and intrinsic value as identical. Fix: Remember that a target has a time horizon and a catalyst. Intrinsic value is today's estimate of worth.
• Assuming buy, hold and sell have fixed return cut-offs worldwide. Fix: Use only the bands given in the question. Firms define their own.
• Confusing top-down with bottom-up forecasting. Fix: Top-down starts from economy or industry and goes down to the firm. Bottom-up starts from the firm's units or segments and adds up.
• Treating the price target as the valuation itself. Fix: Look for the method, key inputs and assumptions behind the target. A target without them is poorly supported.
• Treating disclosure as a cure for every conflict Fix: VI(A) requires disclosure, but disclosure does not excuse a loss of independence. Under I(B), do not accept gifts, benefits or compensation that could reasonably be expected to compromise independence and objectivity, such as pay that compromises a rating.
• Confusing Standard I(B) with VI(A) Fix: I(B) is about maintaining independence in judgment and not accepting influence, including compromising gifts or compensation. VI(A) is about disclosing matters that could impair independence and objectivity, such as ownership and relationships. Use I(B) for pressure, VI(A) for disclosure.

Exam tips

• Expect standalone questions that give a description and ask which section or purpose it matches.
• When a conflict, ownership or compensation appears in the stem, think disclosures and Standard VI(A).
• When fact versus opinion or the investment process is mentioned, think Standard V(B).
• Avoid options with absolute claims such as guaranteed returns or one required layout.
• With no penalty for wrong answers, always answer every question; eliminate options with absolute claims first.
• Read the rating bands in the stem. Never import your own.
• Check the sign of the expected return before computing the size.
• Watch for questions that test the difference between target and intrinsic value through the horizon.