NISM Certifications · NISM-Series-XV: Research Analyst

Company Analysis - Financial Analysis: formula sheet

Full chapter guide

Key formulas

Accounting equation: Assets = Liabilities + Shareholders' equity; The balance sheet must always balance on the reporting date.
Net profit (simplified): Revenue − Expenses (including tax) = Profit after tax; Shown over a period, on the accrual basis.
Net change in cash: Operating cash flow + Investing cash flow + Financing cash flow = Net change in cash; Opening cash + net change = closing cash, which ties to the balance sheet.
Retained earnings roll-forward: Closing reserves = Opening reserves + Profit after tax − Dividends (other adjustments aside); Shows how the P&L links to the balance sheet.
Current assets vs current liabilities: Working capital = Current assets − Current liabilities; Current means due or realisable within 12 months.
Gross profit margin: Gross profit ÷ Net sales × 100; Gross profit = Sales − Cost of goods sold.
Operating profit margin: Operating profit (EBIT) ÷ Net sales × 100; EBITDA margin uses EBITDA, which is before depreciation. Read which one the question asks for.
Net profit margin: Profit after tax (PAT) ÷ Net sales × 100; Uses profit after interest and tax.
Return on equity (ROE): PAT ÷ Average (or closing) shareholders' equity × 100; Use the basis the question states. If none is stated, use the equity figure given.
Return on capital employed (ROCE): EBIT ÷ Capital employed × 100; Capital employed = Total assets − Current liabilities = Equity + Long-term debt (in the usual treatment).
Return on assets (ROA): PAT ÷ Total assets × 100; Some texts add back after-tax interest to PAT. Follow the question's definition.
Current ratio: Current ratio = Current assets ÷ Current liabilities; A value above 1 means current assets exceed current liabilities. The ideal level depends on the industry.
Quick ratio: Quick ratio = (Current assets − Inventory) ÷ Current liabilities; Some texts also exclude prepaid expenses. Follow the data the question gives. Always remove inventory.
Debt-equity ratio: Debt-equity ratio = Total debt ÷ Shareholders' equity; Check whether the question uses total debt or only long-term debt. Use the definition stated.
Interest coverage ratio: Interest coverage = EBIT ÷ Interest expense; EBIT is earnings before interest and tax. Also called times interest earned.
Debt ratio: Debt ratio = Total debt ÷ Total assets; Shows the share of assets financed by debt.
Total asset turnover: Sales ÷ Average total assets; Average = (opening + closing) ÷ 2. Measures sales per rupee of assets.
Fixed asset turnover: Sales ÷ Average net fixed assets; Shows how well plant and equipment generate sales.
Inventory turnover: Cost of goods sold ÷ Average inventory; Uses COGS, not sales, because inventory is carried at cost. If a question gives only sales, use it only when told to.
Days inventory outstanding (DIO): 365 ÷ Inventory turnover; Equals Average inventory ÷ COGS × 365.
Receivable turnover: Net credit sales ÷ Average receivables; If credit sales are not given, questions usually use net sales.
Days sales outstanding (DSO): 365 ÷ Receivable turnover; Also called receivable days or average collection period.
Payable turnover: Purchases ÷ Average payables; Purchases = COGS + closing inventory − opening inventory. Some questions use COGS instead; follow the data given.
Days payable outstanding (DPO): 365 ÷ Payable turnover; Average days taken to pay suppliers.
Cash conversion cycle: DIO + DSO − DPO; Also called the net operating cycle. Operating cycle = DIO + DSO.
ROE: ROE = Net profit ÷ Average (or closing) shareholders' equity; Use the same equity basis (closing or average) in every ratio of the question.
Three-step DuPont: ROE = (Net profit ÷ Sales) × (Sales ÷ Total assets) × (Total assets ÷ Shareholders' equity); Net profit margin × asset turnover × equity multiplier. Total assets cancel out and sales cancel out.
Equity multiplier: Equity multiplier = Total assets ÷ Shareholders' equity; Higher value means more assets financed by debt. It is always 1 or more when equity is positive and assets are at least equal to equity.
Five-step DuPont: ROE = (Net profit ÷ PBT) × (PBT ÷ EBIT) × (EBIT ÷ Sales) × (Sales ÷ Total assets) × (Total assets ÷ Equity); Tax burden × interest burden × EBIT margin × asset turnover × equity multiplier. PBT is profit before tax.
ROA link: ROA = Net profit margin × Asset turnover; ROE = ROA × Equity multiplier; Use this to find a missing figure quickly.
Basic EPS: EPS = (Net profit − Preference dividend) ÷ Weighted average equity shares; Uses profit attributable to equity holders only.
Diluted EPS: Diluted EPS = Adjusted earnings ÷ (Weighted average shares + Potential dilutive shares); Never higher than basic EPS in the usual case of dilution.
P/E ratio: P/E = Market price per share ÷ EPS; Earnings yield = EPS ÷ Price = 1 ÷ P/E.
Book value per share: BVPS = (Net worth − Preference capital) ÷ Number of equity shares; Net worth means equity shareholders' funds.
P/B ratio: P/B = Market price per share ÷ BVPS; Useful for banks and asset-heavy firms.
Enterprise value: EV = Market cap + Debt + Preference capital + Minority interest − Cash and equivalents; Cash is subtracted, debt is added.
EV/EBITDA: EV/EBITDA = EV ÷ EBITDA; Capital-structure neutral, so good for cross-company comparison.
Dividend yield: Dividend yield = Dividend per share ÷ Market price per share; Expressed as a percentage.
Dividend payout ratio: Payout = Dividend per share ÷ EPS (or total dividends ÷ net profit); Retention ratio = 1 − payout ratio.
Cash flow identity: Net change in cash = CFO + CFI + CFF; The three sections add up to the change in cash and equivalents.
FCFF from CFO: FCFF = CFO + Interest × (1 − t) − Capex; Use this when CFO is after interest paid (interest in operating activities). Add back interest after tax.
FCFF from net income: FCFF = NI + Non-cash charges + Interest × (1 − t) − Increase in working capital − Capex; Non-cash charges are mainly depreciation and amortisation.
FCFF from EBIT: FCFF = EBIT × (1 − t) + Depreciation − Increase in working capital − Capex; Starts before interest, so debt does not affect it.
FCFE from FCFF: FCFE = FCFF − Interest × (1 − t) + Net borrowing; Net borrowing = new debt raised − debt repaid.
FCFE from CFO: FCFE = CFO − Capex + Net borrowing; CFO is already after interest, so no interest adjustment.
Cash conversion (quality of earnings): CFO ÷ Net profit; Consistently near or above 1 suggests good quality; persistently well below 1 is a warning.
Discount rates: FCFF → WACC; FCFE → cost of equity; Match the cash flow to the rate.
Cash conversion of profit: Operating cash flow ÷ Net profit; A ratio persistently well below 1 suggests profit is not turning into cash. One year proves little; look at the trend.
Accruals (simple): Accruals = Net profit − Operating cash flow; Large and rising positive accruals signal lower earnings quality.
Receivable days: Receivable days = (Trade receivables ÷ Credit sales) × 365; Rising days while sales grow may mean aggressive revenue recognition or weak collections.
Common size statement: Line item ÷ Net sales × 100 (income statement) or ÷ Total assets × 100 (balance sheet); Lets you compare years and companies of different size.
Trend (index) analysis: Index = (Value in year ÷ Value in base year) × 100; Compare indices of sales, profit, receivables and cash flow.
Core earnings idea: Core profit = Reported profit − exceptional or one-off gains + one-off losses (pre-tax view); Adjust for tax effect where the question gives it.

Quick revision

Gross profit margin = gross profit ÷ revenue; net profit margin = net profit ÷ revenue.
ROE = net profit ÷ shareholders' equity; ROCE = EBIT ÷ capital employed.
Current ratio = current assets ÷ current liabilities; quick ratio excludes inventory from current assets.
Debt-to-equity = total debt ÷ shareholders' equity; higher means more leverage and more risk.
Interest coverage = EBIT ÷ interest expense.
Inventory turnover = cost of goods sold ÷ average inventory; receivable days show how fast customers pay.
DuPont: ROE = net profit margin × asset turnover × equity multiplier.
EPS = (net profit − preference dividend) ÷ weighted average equity shares outstanding.
P/E = price per share ÷ EPS; book value per share = shareholders' equity ÷ shares outstanding.
Free cash flow to the firm is commonly operating cash flow less capital expenditure, but use the definition given in the question.
Profit rising while operating cash flow stays weak, or receivables growing faster than sales, is a red flag.
Read each question for the exact basis: average or year-end, pre-tax or post-tax.

Common mistakes

Treating profit as cash in hand. Fix: Remember accrual versus cash. Credit sales raise profit but not cash until collected.
Saying the balance sheet covers a year. Fix: The balance sheet is a snapshot on one date. The P&L and cash flow cover a period.
Using PAT for ROCE Fix: ROCE uses EBIT because capital employed includes debt, so profit must be before interest.
Using total assets as capital employed Fix: Capital employed = Total assets − Current liabilities. Subtract current liabilities.
Leaving inventory in the quick ratio. Fix: Remember quick means fast cash. Inventory is not fast, so remove it.
Using net profit instead of EBIT in interest coverage. Fix: Interest is paid before tax and out of operating profit, so use EBIT.
Using sales instead of COGS for inventory turnover. Fix: Inventory is valued at cost, so match it with COGS unless the question explicitly says otherwise.
Using the closing balance when the opening balance is also given. Fix: When both balances are given, always average them.
Using equity ÷ assets instead of assets ÷ equity for the equity multiplier. Fix: Remember the multiplier is assets over equity, so it multiplies equity up to assets. It is 1 or more in normal cases.
Mixing closing and average equity or assets within one calculation. Fix: Use one basis throughout, as the question states. If none is stated, use the figures given.

Exam tips

Expect classification questions: which statement shows an item, or which cash flow section it belongs to.
Watch for the words 'as on a date' versus 'for the year'. They decide between balance sheet and the other two.
Profit versus cash questions are common. Credit sales, depreciation and working capital changes are the usual traps.
On 1-mark MCQs with 25% negative marking, skip only if you cannot eliminate at least two options.
Study this with ratio analysis and cash flow analysis, as case-based questions combine them.
Most questions test matching: which profit goes with which base. Learn this pairing first.
Expect a short interpretation question, such as why ROE rose while ROCE stayed flat. The usual answer is higher leverage.
Read the options for traps that use PAT where EBIT is required.