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NISM Certifications · NISM-Series-XV: Research Analyst

Company Analysis - Financial Analysis for NISM Research Analyst

Company Analysis - Financial Analysis in NISM-Series-XV tests whether you can read financial statements and judge a company using ratios, DuPont analysis, valuation metrics, cash flow and earnings quality. To solve questions, recall the formula, plug in the numbers carefully, check the averages or year-end basis, and interpret the result.

What this chapter covers

This chapter teaches you to turn a company's financial statements into a view on its health. You start with the balance sheet, statement of profit and loss and cash flow statement. Then you learn the ratio families: profitability and return, liquidity, leverage and solvency, efficiency, and valuation. DuPont analysis ties several of them together. The chapter ends with cash flow, free cash flow and signs that reported profits may not be reliable.

Questions are mostly of two kinds. Some ask for a definition or the right formula. Others give a small set of numbers and ask you to compute a ratio, then possibly read what it says. You need both the formula and the logic behind it.

This chapter sits between business and governance analysis and the Valuation Principles chapter. Ratios computed here become inputs for valuation, such as earnings per share, book value and free cash flow. It also links to Risk and Return, since leverage raises risk, and to the Legal and Regulatory chapter, since accounting red flags often point to disclosure and governance failures.

In the revised NISM-Series-XV, this chapter carries 12 marks out of 100, one of the largest single chapters alongside Valuation Principles. It is also very scoreable, because most questions have one clear answer once you know the formula. With 25% negative marking on wrong answers, precision matters more than guessing. The same ratios also show up in case-based questions and in the valuation chapter, so time spent here pays off twice.

Company Analysis - Financial Analysis: topics in the order to study them

  1. 1Financial Statements OverviewEvery ratio is built from line items in these statements, so you must know what sits where first.
  2. 2Ratio Analysis: Profitability and Return RatiosMargins and returns such as ROE and ROCE are the most tested ratios and build on the statement of profit and loss.
  3. 3Liquidity, Leverage and Solvency RatiosThese use the balance sheet to show short-term and long-term safety, and are needed before DuPont.
  4. 4Efficiency and Turnover RatiosAsset, inventory and receivable turnover explain how well the business uses its resources and feed into DuPont.
  5. 5DuPont AnalysisIt splits ROE into margin, turnover and leverage, so it only makes sense after the three ratio groups above.
  6. 6Valuation Ratios and Per Share MetricsEPS, book value per share, P/E and similar ratios use earlier concepts and lead into the Valuation Principles chapter.
  7. 7Cash Flow Analysis and Free Cash FlowOnce you know profit-based measures, you compare them with cash generated and learn free cash flow.
  8. 8Quality of Earnings and Accounting Red FlagsThis needs everything before it, since red flags appear as gaps between profit, cash and balance sheet trends.

How to prepare Company Analysis - Financial Analysis

Treat this chapter as a formula and interpretation chapter. Learn each ratio as a pair: how it is calculated and what a high or low value means.

  1. Read the three financial statements once and note which line items feed which ratios.
  2. Make a one-page sheet of ratios grouped by family, with formula, numerator, denominator and meaning in plain words.
  3. Practise calculations by hand with small numbers. Check whether the question uses year-end or average figures, and follow what it states.
  4. Work through DuPont until you can rebuild ROE from net margin, asset turnover and equity multiplier, and move in either direction.
  5. Compare profit with operating cash flow for sample companies, and practise computing free cash flow from the figures given.
  6. Do timed MCQs by topic, then review each wrong answer to see whether it was a formula slip, a unit slip or a misread of the interpretation.
  7. In the last days, revise only your formula sheet and your list of past errors.

Common mistakes in Company Analysis - Financial Analysis

  • Mixing up numerators and denominators in similar ratios, such as ROE and ROCE.

    Fix: Match the profit measure to the capital it belongs to. Net profit goes with equity; EBIT goes with total capital employed.

  • Using year-end figures when the question gives an average, or the reverse.

    Fix: Underline the basis in the question before calculating and use only the figures that match it.

  • Reading a high ratio as always good.

    Fix: Ask what drove the number. High ROE can come from heavy debt, and a very high current ratio can mean idle inventory or cash.

  • Treating DuPont as a new formula to memorise instead of a decomposition.

    Fix: Cancel terms to check that the three parts multiply back to net profit ÷ equity, then practise finding which part changed.

  • Confusing profit with cash flow.

    Fix: Always compare net profit with operating cash flow and remember that capital expenditure is deducted to reach free cash flow.

  • Guessing on calculation questions after a small arithmetic slip.

    Fix: Recheck the sum once, eliminate options that do not match your result's size, and skip if still unsure.

Last-day revision: Company Analysis - Financial Analysis

  • 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.

Company Analysis - Financial Analysis practice questions

Company Analysis - Financial Analysis in other exams

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

Company Analysis - Financial Analysis: frequently asked questions

How many marks does Financial Analysis carry in NISM-Series-XV?

In the revised exam, Company Analysis - Financial Analysis carries 12 marks out of 100. Only Technical Analysis, at 15 marks, is larger. It is among the highest-value chapters in the paper.

Do I need to memorise all the ratio formulas?

Yes, you should know the standard formulas and what they mean. Questions often give figures and expect you to compute the ratio, so recall under time pressure matters. A single formula sheet that you rewrite from memory works well.

Is there negative marking in this exam?

Yes. NISM-Series-XV has negative marking of 25% of the marks assigned to a question. A wrong answer on a 1-mark question costs 0.25 marks, so avoid blind guesses.

How is this chapter connected to Valuation Principles?

Valuation uses numbers from this chapter, such as EPS, book value, cash flows and growth in earnings. If your ratio basics are weak, valuation questions become harder. Study this chapter first.