NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Research
An analyst reports that a stock's earnings per share were Rs 12 last year and Rs 15 this year, and then says a 25% rise in EPS is certain to continue next year. Which research weakness does this best illustrate?
The statement shows extrapolation of past growth without supporting evidence. The 25% rise in EPS is arithmetically correct, but treating it as certain to continue ignores future drivers and risks, so the forecast lacks a reasoned basis.
- AExtrapolating past growth without supporting evidenceCorrect
- BUse of primary data
- CUse of a top-down approach
- DUsing a sampling technique
Explanation
Growth is (15-12)/12 = 25%, so the arithmetic is right. The flaw is asserting that it is certain to continue, which projects history forward without evidence on drivers or risks.
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