NISM Certifications · NISM-Series-XV: Research Analyst

Company Analysis - Business and Governance: formula sheet

Full chapter guide

Key formulas

Porter's Five Forces: 1) Threat of new entrants; 2) Bargaining power of suppliers; 3) Bargaining power of buyers; 4) Threat of substitutes; 5) Rivalry among existing competitors; Strong forces lower industry profit. Learn the exact five names. Do not add 'government' or 'complementors' as a force.
Market share: Market share (%) = Company sales ÷ Total industry sales × 100; Use the same period and the same market definition for both numbers.
Operating margin: Operating margin (%) = Operating profit ÷ Revenue × 100; A margin above peers can hint at pricing power or cost advantage.
Revenue concentration: Share of top customer (%) = Revenue from top customer ÷ Total revenue × 100; A high share signals dependence risk.
Generic strategies: Cost leadership | Differentiation | Focus; These are the three ways a firm builds competitive advantage in Porter's framework.
Moat test (economic profit): Economic profit = (ROIC − Cost of capital) × Invested capital; A moat shows up as ROIC staying above the cost of capital for many years, not for one year.
Cost leadership vs differentiation: Cost leadership = lowest cost; Differentiation = unique value and premium price; Cost leaders compete on cost position. Differentiators compete on features, brand or service.
Sustainability rule: Moat = advantage + durability + difficulty to copy; An advantage that can be copied quickly is not a moat.
Gross margin: Gross margin = (Revenue − Cost of goods sold) ÷ Revenue × 100; Stable or high margins relative to peers can hint at pricing power or cost advantage.
Capital allocation test: Return on new investment > Cost of capital → value created; A qualitative rule of thumb. Good management invests only where expected returns exceed the cost of capital.
Execution check: Actual results ÷ Past guidance or promises; Compare over several years. Repeated shortfalls signal weak execution.
Five areas of management assessment: Experience + Capital allocation + Execution + Integrity + Succession; Use this as a checklist to classify any exam scenario.
Promoter pledge ratio: Promoter shares pledged ÷ Total promoter shares held × 100; A rising ratio signals financial stress or risk to promoter control. Treat it as a flag, not proof of wrongdoing.
Pledged percentage of promoter holding: Pledged % of promoter holding = Pledged shares ÷ Promoter shares × 100; The base is the promoter's own shares, not total company shares.
Pledged percentage of total equity: Pledged % of total shares = Pledged shares ÷ Total shares outstanding × 100; Equals promoter holding % × pledged % of promoter holding ÷ 100.
Cash conversion check: Operating cash flow ÷ Net profit; A persistent ratio well below 1 suggests earnings may not be turning into cash. It is a prompt to investigate, not proof.
RPT share of revenue: RPT sales ÷ Total revenue × 100; A high or rising share means dependence on connected parties. Test whether pricing is at arm's length.
Promoter holding: Promoter holding % = Shares held by promoter and promoter group ÷ Total shares outstanding × 100; Public holding % = 100 − promoter holding %, when only these two categories exist.
Pledge ratio: Pledged % = Pledged promoter shares ÷ Total promoter shares × 100; Check the base. It is usually promoter shares, not total shares. Read the question wording.
ESG components: ESG = Environmental + Social + Governance; Know which factor each example belongs to. Board independence is G, emissions is E, worker safety is S.
BRSR indicators: Essential = mandatory; Leadership = voluntary; Both sit under the principle-wise performance disclosures.
Change in holding: Change = Holding % this quarter − Holding % last quarter; Quote in percentage points, not percent.

Quick revision

A business model explains who the customers are, what is sold, and how the company earns revenue and profit.
An economic moat is a lasting advantage that protects a company's returns from competitors.
A temporary advantage, such as a short-term price cut, is not a moat.
Common moat sources include brand, cost advantage, switching costs, network effects and regulatory licences.
Management quality is judged by track record, capital allocation, consistency of statements and delivery.
Corporate governance is the system by which a company is directed and controlled in the interest of its stakeholders.
Independent directors and board committees are key checks on promoters and management.
Related party transactions need close scrutiny for fairness of terms and for disclosure.
Frequent auditor changes, aggressive accounting and unexplained promoter pledging are typical red flags.
ESG stands for environmental, social and governance factors.
Shareholding pattern shows promoter, institutional and public holdings, and changes in it carry information.
Check exact regulatory limits and definitions in the NISM workbook before the exam.

Common mistakes

Confusing threat of substitutes with rivalry among existing competitors. Fix: Rivals sell the same kind of product in the same industry. Substitutes meet the same need in a different way, such as a ride-hailing app against a personal car.
Saying high entry barriers mean a high threat of new entrants. Fix: High barriers mean a low threat of entry. Always state the direction of the force.
Treating a large market share as proof of a moat. Fix: Ask whether the lead is durable and hard to copy. Share alone is not a moat.
Confusing cost leadership with simply charging low prices. Fix: Cost leadership is about having a lower cost base. Low prices without low cost only hurt margins.
Judging management only on one year of profit growth. Fix: Look for consistency across cycles and compare actual delivery with earlier guidance.
Treating a charismatic or famous promoter as proof of quality. Fix: Rely on facts: capital allocation record, disclosures, treatment of minority holders and regulatory history.
Treating pledged shares as shares the promoter has sold. Fix: Remember ownership stays with the promoter unless the lender invokes the pledge. Pledging is a charge on shares held.
Calculating pledged percentage on total shares when the question asks for percentage of promoter holding. Fix: Read the base words. 'Of promoter holding' means divide by promoter shares.
Putting board independence or related party dealings under social factors. Fix: Anything about board, control, disclosure, audit or shareholder rights is governance. Social is about employees, customers and communities.
Treating Leadership indicators in BRSR as mandatory. Fix: Essential indicators are mandatory. Leadership indicators are voluntary.

Exam tips

Learn the five force names exactly and practise matching a one-line clue to a force and its direction.
Watch the direction words: high barriers lower entry threat; strong suppliers or buyers hurt the company.
Questions are often scenario based. Underline the clue before reading the options.
Be careful with absolute words like 'always' and 'only'; they often mark wrong options.
Under negative marking, skip a scenario only if you cannot tell the force. Most can be solved by keyword mapping.
Learn the difference between a strategy (cost leadership, differentiation) and a source (brand, scale, switching costs, network effects).
Watch for the words 'sustainable', 'durable' and 'hard to copy'. They signal a moat question.
In scenario questions, match the customer behaviour described to the source before reading the options.