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NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Research

A research analyst finds that a company's reported profit rose 30% but wants to know whether this was driven by operations or one-off items. Which research practice best addresses this?

The analyst should adjust reported earnings to exclude non-recurring or exceptional items so that sustainable operating earnings can be assessed. This separates genuine business performance from one-off gains, giving a more reliable basis for forecasting and valuation.

  1. ARelying solely on management commentary
  2. BAdjusting earnings to exclude non-recurring items to assess sustainable earningsCorrect
  3. CUsing only the closing share price trend
  4. DComparing the profit with the previous day's trading volume

Explanation

Normalising earnings by removing exceptional or non-recurring gains and losses reveals the sustainable, operating earnings power. Management commentary may be biased, and price or volume data say nothing about the quality of earnings.

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