NISM Certifications Research Analysis and Fundamental Valuation Flashcards

24 sample cards from the Research Analysis and Fundamental Valuation deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is the DuPont decomposition of Return on Equity (ROE)?

   ROE = Net Profit Margin x Asset Turnover x Financial Leverage = (Net Income/Sales) x (Sales/Assets) x (Assets/Equity).

2. What is the formula for Return on Capital Employed (ROCE)?

   ROCE = EBIT / Capital Employed, where Capital Employed = Total Assets - Current Liabilities (or Equity + Long-term Debt). It measures efficiency of total capital use.

3. What is the Interest Coverage Ratio and what does it show?

   Interest Coverage Ratio = EBIT / Interest Expense. It shows how many times a company can cover its interest obligations from operating earnings; higher is safer.

4. What is the Inventory Turnover ratio formula?

   Inventory Turnover = Cost of Goods Sold / Average Inventory. It measures how efficiently inventory is converted into sales.

5. What does 'quality of earnings' refer to?

   The degree to which reported earnings reflect true, sustainable, cash-backed operating performance rather than one-time items, aggressive accounting, or accruals. High-quality earnings are stable, recurring, and cash-supported.

6. Name common red flags indicating low quality of earnings.

   Growing gap between net income and operating cash flow, rising receivables/inventory faster than sales, frequent one-off gains, aggressive revenue recognition, capitalizing expenses, related-party transactions, and frequent changes in accounting policies.

7. What is the formula for Free Cash Flow to Firm (FCFF)?

   FCFF = EBIT x (1 - Tax Rate) + Depreciation & Amortization - Capital Expenditure - Increase in Working Capital.

8. What is Free Cash Flow to Equity (FCFE)?

   FCFE = FCFF - Interest Expense x (1 - Tax Rate) + Net Borrowing. It is the cash available to equity shareholders after debt obligations.

9. What discount rate is used to value FCFF versus FCFE?

   FCFF is discounted at the Weighted Average Cost of Capital (WACC); FCFE is discounted at the cost of equity (Ke).

10. What is the formula for the Weighted Average Cost of Capital (WACC)?

    WACC = (E/V) x Ke + (D/V) x Kd x (1 - Tax Rate), where E = equity, D = debt, V = E+D, Ke = cost of equity, Kd = cost of debt.

11. How is the cost of equity estimated using the Capital Asset Pricing Model (CAPM)?

    Ke = Rf + Beta x (Rm - Rf), where Rf = risk-free rate, Beta = systematic risk, and (Rm - Rf) = the equity market risk premium.

12. What is the Gordon Growth (constant growth) Dividend Discount Model formula?

    Value = D1 / (Ke - g), where D1 = next year's expected dividend, Ke = cost of equity, and g = constant dividend growth rate (must be less than Ke).

13. How is the terminal value calculated in a DCF using the perpetuity growth method?

    Terminal Value = FCF in final year x (1 + g) / (WACC - g), then discounted back to present value. It captures the value of cash flows beyond the explicit forecast period.

14. What is relative valuation and how does it differ from DCF?

    Relative valuation values a company by comparing its multiples (P/E, EV/EBITDA, P/B) to peers or industry averages. DCF (intrinsic/absolute) values a company based on its own projected discounted cash flows.

15. What is the Price-to-Earnings (P/E) ratio and how is it interpreted?

    P/E = Market Price per Share / Earnings per Share. It shows how much investors pay per rupee of earnings; a high P/E may signal growth expectations or overvaluation.

16. What is the EV/EBITDA multiple and why is it useful?

    EV/EBITDA = Enterprise Value / EBITDA. It is capital-structure neutral and ignores depreciation/tax differences, making it useful for comparing companies with different leverage and across borders.

17. How is Enterprise Value (EV) calculated?

    EV = Market Capitalization + Total Debt + Minority Interest + Preferred Equity - Cash & Cash Equivalents.

18. What is the PEG ratio and what does it adjust for?

    PEG = P/E Ratio / Annual EPS Growth Rate (%). It adjusts the P/E for growth; a PEG around 1 is often considered fairly valued.

19. Name some 'other' valuation methods beyond DCF and relative valuation.

    Sum-of-the-parts (SOTP) valuation, asset-based/net asset value (NAV) valuation, replacement cost, liquidation value, and price-to-book for asset-heavy or financial firms.

20. In technical analysis, what is the difference between support and resistance?

    Support is a price level where buying interest tends to halt a decline; resistance is a level where selling pressure tends to halt an advance. Broken support can become resistance and vice versa.

21. What does the Relative Strength Index (RSI) measure and what are its standard thresholds?

    RSI is a momentum oscillator (0-100) measuring the speed and magnitude of price moves. Above 70 is typically overbought; below 30 is typically oversold. The standard period is 14.

22. What is a 'head and shoulders' chart pattern and what does it signal?

    A reversal pattern with three peaks - a higher central peak (head) between two lower peaks (shoulders). It signals a likely trend reversal from bullish to bearish once the neckline breaks.

23. What is a moving average crossover (golden cross vs death cross)?

    A golden cross occurs when a short-term moving average crosses above a long-term one (bullish signal); a death cross occurs when the short-term crosses below the long-term (bearish signal).

24. How is trading volume used to confirm price trends?

    Rising volume confirms the strength of a price move (uptrend or breakout), while a price move on low/declining volume is considered weak and prone to reversal. Volume should expand in the direction of the trend.

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Research Analysis and Fundamental Valuation flashcards FAQ