CFA Level I Exam · Equity Analyst Research Reports

Valuation, Financial Forecasts and Risk Analysis in Equity Research Reports

Updated 7 October 2026 · Fact-checked

In an equity research report, the forecast section projects revenue, margins and earnings. The valuation section converts those forecasts into a value per share using discounted cash flow or multiples. The risk section lists what could make the thesis wrong. Exam questions ask you to judge whether each part is clear, consistent and supported.

Understand Valuation, Financial Forecasts and Risk Analysis

An equity research report exists to support a recommendation. The analyst states a thesis, such as "this stock is undervalued". Three sections then carry the proof: the financial forecasts, the valuation and the risks.

Forecasts come first. The analyst projects revenue, costs, earnings and cash flows for the next several years. Two approaches are common. A top-down forecast starts with the economy or industry and works down to the company. For example, it forecasts industry sales and then applies a market share. A bottom-up forecast starts with the company's own units, such as stores, products or customers, and adds them up. Many analysts combine both and compare the results.

Valuation turns forecasts into a price. Absolute valuation estimates intrinsic value, usually with a discounted cash flow or dividend discount model. Relative valuation compares multiples such as P/E or EV/EBITDA with peers or with the company's own history. A good report explains why it chose the method, states the key inputs (growth, discount rate, target multiple) and shows how the value leads to the rating and the price target.

Risks complete the case. A good report names specific risks to the thesis, such as loss of a key customer, new competition, regulation, currency moves, high leverage or accounting quality. It also says how each risk would affect the forecast or valuation. A generic list such as "market conditions may change" adds little. Analysts often use scenario analysis (base, best and worst case) or sensitivity tables to show the range of outcomes.

The exam tests whether you can judge quality. Forecast assumptions should be stated and consistent with the industry and the company's history. The valuation should follow from the forecasts. The risks should be tied to the thesis. A report that is one-sided, vague or silent on its assumptions is weak.

Key formulas to remember

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%.

How to solve Valuation, Financial Forecasts and Risk Analysis questions

Use this method for any question on forecasts, valuation or risks in a research report.

1Read the stem and decide which section it is about: forecast, valuation or risk.
2Identify the thesis or rating the report supports.
3For forecasts, check whether the approach is top-down, bottom-up or both, and whether the assumptions are stated and realistic.
4For valuation, identify the method (absolute or relative), the key inputs and whether the inputs match the forecasts.
5For risks, check whether each risk is specific, linked to the thesis and has an estimated impact.
6Do any needed arithmetic: market share × industry sales, multiple × metric, or upside to target.
7Eliminate the two options that overstate, ignore assumptions or contradict the report, then pick the best fit.

Quickest way: Three-check filter for research report questions

When to use it: Use when a question asks which statement best describes or evaluates part of a research report and you have about 90 seconds.

Ask: does the forecast start from industry (top-down) or company drivers (bottom-up)? Match the option to that.
Ask: does the valuation follow from the forecast with stated inputs? Reject options that treat a price target as unsupported.
Ask: is the risk specific and linked to the thesis? Reject generic or unrelated risks.
For numbers, compute once, then match to the three options, which run smallest to largest.
If unsure, choose the option that is balanced, transparent and consistent.

Common mistakes in Valuation, Financial Forecasts and Risk Analysis

Confusing top-down with bottom-up forecasting.
Both end with company revenue, so the starting point gets blurred.
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.
The target is the headline number, so students forget it comes from a method and inputs.
Fix: Look for the method, key inputs and assumptions behind the target. A target without them is poorly supported.
Accepting generic risk statements as good risk analysis.
Lists such as "economic slowdown" sound reasonable.
Fix: Good risk analysis is specific to the company, linked to the thesis and says how forecasts or value would change.
Using a multiple from peers without checking comparability.
A peer P/E is easy to copy.
Fix: Check that peers have similar growth, risk, margins and accounting before applying their multiple.
Giving a single-point forecast and ignoring scenarios.
One number looks precise.
Fix: Forecasts are uncertain. Scenario analysis and sensitivity tests show how the value changes if assumptions are wrong.

Worked examples

Example 1

An analyst forecasts that industry sales next year will be $8.0 billion. She expects the company's market share to be 12.5%. The company's forecast net income is 9% of sales. Which of the following is the forecast net income? A) $60 million B) $90 million C) $100 million

Show the solution

The method is top-down: industry sales × market share.
Company sales = $8,000 million × 0.125 = $1,000 million.
Net income = $1,000 million × 0.09 = $90 million.
Check the options: $60 million and $100 million do not match.

Answer: B) $90 million

Example 2

A report values a stock using forecast EPS of €3.20 and a target P/E of 15. The current price is €40. Which of the following is the expected price return to the target? A) 12% B) 20% C) 25%

Show the solution

Target price = 15 × €3.20 = €48.
Expected return = (48 − 40) ÷ 40.
= 8 ÷ 40 = 0.20, or 20%.
Check the options: 12% and 25% do not match.

Answer: B) 20%

Exam tips

Questions often ask you to judge a report section, not calculate. Look for words like stated assumptions, specific, consistent and supported.
Know the difference between top-down and bottom-up, and that analysts often use both to cross-check.
Absolute valuation uses intrinsic value models. Relative valuation uses multiples against comparables. Match the method to the description.
Options never say 'all of the above', so pick the single best statement. Balanced, transparent options usually beat one-sided ones.
For arithmetic, compute market share × industry sales or multiple × EPS first. Then check which option matches.

Practice questions from Equity Analyst Research Reports

Valuation, Financial Forecasts and Risk Analysis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Valuation, Financial Forecasts and Risk Analysis: frequently asked questions

What does the valuation section of an equity research report contain?

It names the valuation method, such as discounted cash flow or price multiples. It lists the key inputs and shows how the value per share leads to the price target and rating. A good one also explains why the method suits the company.

How do I identify risks in an equity research report?

Look for risks tied to the company and the thesis, such as customer concentration, competition, regulation, leverage or currency exposure. A strong report also shows the likely effect on earnings or value. Generic statements are weaker.

What is the difference between top-down and bottom-up forecasting?

Top-down starts with the economy or industry and works down to the company, often through market share. Bottom-up starts with company-level drivers like units, stores or segments and adds them up. Analysts often use both to check each other.

How do analysts forecast earnings for a research report?

They forecast revenue first, then costs and margins, and then taxes, interest and share count to reach earnings per share. Assumptions should be stated and consistent with industry trends and company history. Scenarios show the range of outcomes.