NISM RA Chapter 8 — Financial Analysis: statements, ratios, DuPont and the case-study math

This is my note on Chapter 8 of the NISM-Series-XV Research Analyst workbook — “Company Analysis: Financial Analysis.” At 12 marks, this is one of the two heaviest chapters of the exam, and it is almost entirely numerical. This is where reading stops being enough — the formulas in this chapter have to be practised until they’re automatic, because the exam’s case studies are built directly on them. The workbook even includes two full case studies with six questions each, and I’ve worked through their logic at the end of this note.

A reassuring line from the workbook first: to do good financial analysis, an analyst need not be a great accountant — but must be able to read and interpret the financial statements. That’s the goal of this chapter.

The complete set of financial statements

In India, the list and format of financial statements for listed companies is governed by Schedule III of the Companies Act 2013 and IndAS 1. The complete set:

1. Balance Sheet (Statement of Financial Position) — assets, liabilities and equity at the end of the reporting period.
2. Statement of Profit and Loss — income, expenses and profits for a period. IndAS 1 requires it to also include Other Comprehensive Income (OCI) — certain fair-value gains and losses that are required or permitted to bypass the P&L.
3. Statement of Changes in Shareholder’s Equity — movements in equity from profits, dividends, share issues, buybacks and OCI. IndAS 1 treats this as part of the balance sheet.
4. Cash Flow Statement — sources and uses of cash.
5. Detailed Notes — accounting policies and breakdowns of everything above.

Every statement must show at least one prior period alongside the current one, for comparison.

Standalone vs consolidated — which to use

Every company is a separate legal entity and prepares its own standalone financial statement. But for large groups, standalone numbers mislead: Toyota Motor Corporation’s standalone statement shows only its Japanese entity’s sales — everything done through subsidiaries in India, China or North America is invisible.

So companies with subsidiaries must present consolidated statements, combining all controlled companies as a single group. The control test matters for the exam: control means owning more than 50% of voting rights OR having the right to appoint the majority of the board. So a holding company doesn’t necessarily need over 50% ownership — if it has the power to control strategy and operations (per IndAS 110), it’s de-facto control and consolidation is required.

For equity analysis, consolidated statements are generally preferred — they give the holistic group picture. The exception: when a subsidiary can’t pass dividends up to the parent (strict capital controls in its geography, or a debt covenant blocking dividends), the parent’s standalone position matters too — can it fend for itself in a crisis?

The SEBI rules to remember: consolidated statements are mandatory annually; standalone results are mandatory quarterly. Some companies voluntarily publish consolidated quarterlies — analysts struggle with groups that don’t, because they’re left with dated information between annual reports.

Reading the balance sheet

The format comes from Schedule III — except for banking, insurance and utility companies, which follow formats prescribed by their own regulators.

The asset side

Assets are items expected to provide future benefits — but accounting only recognizes assets that are quantifiable in money and have been paid for. Self-generated assets (like your own brand name) cannot be recognized. Assets split into current (benefits within one operating cycle, conventionally one year) and non-current (everything else).

Non-current assets:

• Property, Plant and Equipment (PPE) — land, buildings, machinery, furniture, computers; shown at historical cost net of accumulated depreciation. IndAS 16 allows a revaluation model, applied to an entire asset class.
• Capital Work in Progress — PPE under construction; transferred to PPE when ready.
• Goodwill — arises on acquiring a business: the consideration paid over and above the fair value of net assets taken over. The workbook’s example: Bharti Airtel acquired 100% of Tigo Rwanda for ₹3,200 crore when the fair value of Tigo’s net assets was ₹2,838 crore — the balance became goodwill. Goodwill is tested periodically for impairment; if its value in use falls below carrying value, the difference is written off. The reverse case: if a company pays less than fair value of net assets, the difference goes to capital reserves on the equity side.
• Intangible assets — legal rights: acquired copyrights, patents, brand names. Self-generated ones can’t be shown — but internally developed software can. Shown at cost minus accumulated amortisation. (Plus intangibles under development, transferred when ready.)
• Investments in joint ventures / associates — strategic investments the company does not control, reported under the equity method: the carrying amount is adjusted for the investor’s share of the investee’s profit/loss and OCI, reduced by dividends received, and includes initial goodwill less impairment.
• Non-current financial assets — long-term investments, loans, advances; debt-type items held for interest and principal at amortised cost, others at fair value.

Current assets:

• Inventory — raw material, work-in-progress, unsold finished goods, at cost or market value, whichever is lower.
• Current financial assets — cash and equivalents (including short-term deposits and money-market investments), other bank balances, receivables (net of provision for doubtful debts), short-term investments at fair value.
• Other current assets — benefits receivable in kind within a year, like prepaid expenses.

The equity side

Equity is the residual interest — assets minus liabilities — belonging to the owners. Components: share capital (face value of paid-up capital); share premium (amounts above face value received in IPOs/FPOs); retained earnings (accumulated undistributed profits and OCI); general reserve (retained earnings earmarked for future purposes); capital and revaluation reserves (surpluses from recognizing assets above acquisition price — typically NOT distributable as dividend); and minority interest / non-controlling interest — the share of a subsidiary’s equity belonging to shareholders other than the parent. That last item exists only in consolidated statements — a classic exam detail.

The liability side

Non-current liabilities (due after one year):

• Long-term debt — loans, debentures, bonds due beyond a year. The portion falling due within a year is shown separately as current portion of long-term debt under current liabilities.
• Lease liability — when a company acquires the right to use an asset under a lease longer than a year, it must recognize the liability (fair value of the lease minus principal repaid, or present value of lease payments). Analysts typically count lease liabilities as part of debt.
• Derivative instruments — mark-to-market losses on derivative contracts (non-current if settling after a year, current if within).
• Deferred revenue — the obligation attached to advance receipts. The workbook’s example: a customer buys a 6-month prepaid pack for ₹1,200; after one month, ₹200 is revenue and ₹1,000 (1,200 × 5/6) sits as deferred revenue.
• Provisions — amounts set aside for a specific obligation not yet fully quantifiable (retirement benefits, warranties, un-adjudicated legal liability). Contrast with reserves, which are for unknown purposes.

Current liabilities (within one year): payables to suppliers; short-term debt (borrowed for under a year — though in practice often rolled over and carried much longer); short-term provisions; current portion of long-term debt; deferred revenue; customer advances; unpaid and accrued expenses.

Metrics analysts build from the balance sheet

Balance sheets often fail to reflect fair value (historical cost, money measurement), and standard categories don’t suit every analysis — so analysts compute their own metrics:

Total debt — debt differs from other liabilities: it’s settled in cash and carries interest as compensation for time value. Total debt = long-term debt + current portion of long-term debt + short-term debt + finance lease obligations + accrued interest. For Bharti Airtel FY2019, this summed to ₹12,87,036 million (about ₹1.29 lakh crore) across secured loans, unsecured term loans, non-convertible bonds and debentures, lease obligations, deferred payment obligations and short-term borrowings.

Working capital — the capital invested to sustain one operating cycle (the cash-to-cash cycle): the company spends first and waits for customers to pay later. The accountant’s version: net working capital = current assets − current liabilities. Bharti Airtel’s was deeply negative (current assets ₹329.06 billion vs current liabilities ₹930.55 billion).

Core working capital — the accountant’s version misleads, because current assets include short-term investments unrelated to operations, and current liabilities include items like current maturities of long-term debt. So analysts compute core working capital = inventory + trade receivables − trade payables (and it’s sensible to add a reasonable cash balance for smooth operations). This is what banks look at when assessing working capital finance needs.

Reading the profit and loss account

The line items, top to bottom:

Revenue — earnings from selling goods and services (core operations; incidental income sometimes shown as other operating income). Other income — non-operating income like investment income or profit on asset sales.

Expenses vary by industry, but the common ones: employee cost (salaries, benefits, notional stock-compensation expense, welfare, and the annual provision for retirement benefits earned that year); depreciation (allocation of the one-time cost of tangible assets over useful life — IndAS 16 requires the method to reflect how the asset is used: a cab operator may depreciate by distance, another company by years); amortisation (the same for intangibles); finance cost (interest, processing fees, amortisation of security-issuance expenses); and other expenses. Manufacturing companies add three standard lines: cost of raw materials (for periodic inventory systems: purchases + opening stock − closing stock), purchase of stock-in-trade (goods resold without processing — most retail-sector purchases), and changes in inventory of WIP and finished goods (production costs stay in inventory until goods are sold; this line is the difference between opening and closing balances).

An India-specific quirk worth knowing: Indian disclosure requirements are high for raw materials but low for other direct expenses — which makes gross profit impossible to calculate properly for Indian companies.

Further down: income from equity-accounted entities (share of JV/associate profits); exceptional / non-recurring items (natural calamities, one-time regulatory charges); and tax, which has three components — current tax, MAT (usable as future credit, so theoretically an asset — expensed only if the company doubts it can use the credit in time), and deferred tax (no cash impact; pure accounting for timing differences between the tax authorities and accounting standards). Then profit allocated to non-controlling interest (the subsidiary profit belonging to non-parent shareholders).

EPS comes in two flavours: Basic EPS = net profit ÷ time-weighted average shares outstanding. Diluted EPS assumes all in-the-money warrants, ESOPs and convertibles are converted, adjusts profit for the impact, and divides by the diluted share count. For loss-making companies, basic and diluted EPS are the same.

Other Comprehensive Income — items bypassing the P&L: revaluation surplus changes, re-measurement of defined benefit plans, foreign-operation translation gains/losses, fair-value changes routed through OCI, and effective-hedge derivative gains/losses.

The P&L waterfall — the “diagram” to hold in your head

Analysts convert single-step statements into a multi-step waterfall. This structure IS the chapter — every profit metric is a stop on the way down:

Revenue (+ other operating income) → minus operating expenses = EBITDA → minus depreciation & amortisation = EBIT (operating profit) → minus finance costs, plus finance/other income, plus share of JV profits = Profit before tax and exceptional items → plus/minus exceptional items = Profit before tax → minus current tax and deferred tax = Profit after tax (PAT) → remove exceptional items net of their tax = Adjusted PAT

The Bharti Airtel FY2019 numbers make it concrete: total revenue ₹810,714 million → EBITDA ₹261,101 → EBIT ₹47,626 → a pre-tax loss of ₹17,318 after finance costs of ₹110,134 — the interest bill alone was more than double the operating profit. That single comparison is the whole argument for ratio analysis.

Why each level matters: Gross profit (revenue − cost of goods sold) shows the surplus available to meet fixed costs — but can’t be computed for Indian companies (see above). EBITDA is the comparison metric of choice across firms because it’s uncontaminated by capital structure (interest), infrastructure choices and accounting choices (depreciation) — and analysts increasingly compute adjusted EBITDA, stripping out investment and non-operating income too. EBITDA also proxies for cash profit from operations — but the workbook says use it that way only as a last resort. EBIT measures the ability to meet annual interest — it feeds the interest coverage ratio and free cash flow calculations. PAT is what’s left for shareholders after lenders and government. Adjusted PAT removes exceptional items with their tax impact — and where the effective tax rate is meaningless (Bharti paid large taxes despite reporting losses), the analyst must judge: identify the specific exceptional item and apply the tax rate relevant to it.

The cash flow statement

Profit and cash are not the same thing, because accounting is on the accrual basis: income is recognized when earned, not when received; expenses when incurred, not when paid. The workbook’s example: buy for ₹80,000 cash and sell for ₹1,00,000 cash — ₹20,000 profit, and the cash is in hand. But sell that ₹1,00,000 on credit and the P&L still shows ₹20,000 profit — with no money. If the customer never pays, there’s no profit and even the ₹80,000 capital is gone. Paper profits are not real profits — hence the cash flow statement.

Cash flows divide into three streams:

• Operating — cash from business operations (P&L items). Net profit converts to operating cash flow by adding back non-cash expenses (depreciation, amortisation) and adjusting for changes in receivables and payables.
• Investing — cash on account of assets (balance sheet items): buying assets is negative, selling is positive.
• Financing — cash on account of liabilities: borrowing or issuing equity is positive; redeeming debt or equity is negative.

The danger signal: continuously negative operating cash flow for years. Such a business needs constant cash stimulus — borrowing or equity — to survive, and either turns positive or dies when investors and lenders refuse to pump more in. The workbook’s case: Kingfisher Airlines — negative operating cash flows year after year (₹−645.78 crore in FY2009 through ₹−1,390.86 crore in FY2013, alongside mounting losses), borrowing money just to pay interest because EBIT was far below interest obligations, until lenders stopped. No business runs on continuous expansion of borrowed money.

Expansion needs cash: negative investing flows are financed by positive operating flows, accumulated cash, or financing flows. Businesses depending excessively on borrowed funds for expansion deserve caution — assets may realize below book value, but liabilities must be met in full.

The four rules of cash flow reading: net cash flow alone is deceptive; analyse each of the three streams independently; focus on sustainable, recurring cash flows; and identify and adjust non-recurring/extraordinary items.

Notes to accounts — where the fine print lives

Significant accounting policies — there are multiple ways to account for the same item (straight-line vs written-down-value depreciation, for instance), so the analyst must know which the company chose. Companies must disclose changes in policy — and a company continuously changing accounting policies is a reason for suspicion of manipulation.

Contingent liabilities — liabilities that may arise depending on an uncertain future event (a court case that could produce a big loss). They are NOT recorded in the accounts, only in the notes. Examples: outstanding lawsuits, tax disputes, bank guarantees given, product warranty claims, pending investigations, FX and policy changes. Managements always sound confident these won’t crystallize — the analyst’s job is to compare the quantum against the size of the P&L and balance sheet, and exercise caution when it’s large.

Off-balance sheet items — any asset or liability not on the balance sheet: operating leases, contingent liabilities, derivative contracts (which sit in the notes). Given how many businesses worldwide have been threatened by derivative positions, analysts must study off-balance sheet items in detail — positive surprises are fine; negative ones are the risk.

And the workbook’s general wisdom for this section: numbers can be made to look good through assumptions and creative accounting — the auditors’ qualifications in the fine print are among the most useful parts of an annual report. What investors should want is consistency: growing sales, rising profits, rising net worth, falling debt, improving margins, improving return on net worth, year after year.

The audit report — three possible verdicts

Management prepares the accounts; auditors verify that they present a true and fair view. Auditors can’t vouch for complete accuracy — transaction volumes are far too large to check everything. So they verify that adequate control systems exist to capture and record transactions correctly, check the controls were implemented, and then assess compliance with accounting standards. Their report falls into one of three categories:

1. Clean report — no issues; largely standard format across companies.
2. Disclaimer — the auditors were unable to verify part of the financials because information wasn’t available.
3. Qualified report — the auditors are convinced that all or part of the statements do NOT reflect a true and fair view — they disagree with an accounting policy or see serious discrepancies.

For disclaimers and qualified reports, auditors elaborate their reasons — and the analyst must always read the audit report to check for reservations.

Ratio analysis — why and how

A number alone means little. Bharti’s ₹47.6 billion operating profit sounds large — until you see it’s 5.8% of ₹807.8 billion revenue, and less than half the ₹110 billion interest expense. Ratio analysis — expressing one line item as a percentage or multiple of a related one — serves three purposes:

Descriptive — adding proportion (“operating profit was 5.8% of revenue”). Diagnostic — finding what worked or failed. Bharti’s revenue fell ~2% but EBITDA fell ~14%; computing every expense as a % of revenue revealed the culprit: network operating expenses jumped from 23.8% to 27.6% of sales, moving up independent of revenue. Predictive — studying how line items behave to forecast. Most Bharti expenses stayed roughly constant as a % of sales (so they move with sales — variable), while network operating expenses rose as sales fell (so they’re largely fixed). With that behaviour mapped, a revenue estimate lets you forecast expenses.

The one rule: only compare numbers that are genuinely related.

The ratio toolkit — every formula

Profitability ratios (profit per rupee of sales)

EBITDA Margin = EBITDA ÷ Net Sales. Profitability from pure operations, unaffected by depreciation policy, funding choices and tax — ideal for comparing peers. Bharti FY2019: 261,101 ÷ 810,714 = 32.2%, about 440 bps below FY2018’s 36.6%.

PAT Margin = PAT ÷ Net Sales. What’s left for shareholders after everyone else, including the government. Bharti: 16,875 ÷ 810,714 = 2.1%.

(Also used: EBIT margin — operating profit margin — and for valuation, NOPAT = EBIT × (1 − tax rate).)

Return ratios (productivity of capital)

ROE = PAT ÷ Net-worth, where net-worth = equity share capital + reserves & surplus. The single most important starting parameter for an equity investor — it shows how efficiently the business allocates capital. Key technique: sales and profit cover a period, but net-worth is a point-in-time number — so use the average of opening and closing net-worth. Bharti: average net-worth = (849,486 + 783,483) ÷ 2 = 816,485; ROE = 16,875 ÷ 816,485 = 2.1%.

ROCE = EBIT ÷ Capital Employed, where capital employed = total assets − non-interest-bearing current liabilities, or equivalently book equity + book debt (again averaged). It measures returns for all capital providers and lets you compare companies of different sizes in the same industry. Bharti: total capital was 1,896,818 (FY18) and 2,103,763 (FY19); ROCE = 47,626 ÷ average = 2.38%. It’s a pre-tax measure — multiply by (1 − tax rate) for the post-tax version.

Leverage ratios (debt and the ability to bear it)

D/E Ratio = Total Adjusted Debt ÷ Net-worth. Adjusted debt includes all interest-bearing liabilities, short and long term, plus items like pension deficits and convertibles. The conservative benchmark: D/E of 1 or less, then judged against industry, track record and project details. Bharti FY2019: 1,287,036 ÷ 849,480 = 1.52x.

Interest Coverage Ratio = EBIT ÷ Interest Expense. How many times earnings cover the interest obligation. High = comfortable. Below one or negative = earnings can’t even meet interest — the business is borrowing or issuing equity to run the show, and faces serious problems if it doesn’t turn around. Kingfisher again.

Liquidity ratios (meeting obligations as they arise)

Current Ratio = Current Assets ÷ Current Liabilities (also called the working capital ratio). Above 1 means current assets exceed current liabilities. But read the components: high finished-goods inventory may mean slowing sales; high raw-material inventory, poor planning; high receivables, easy credit or collection trouble; high payables — possibly strength in extracting credit terms from suppliers. And the crucial nuance: companies that collect cash on sales and pay suppliers on credit run current ratios below 1 — not a red flag but a very good situation, with operations funded by customers. Companies with high bargaining power often prefer negative working capital: it’s an interest-free obligation. Bharti’s current ratio: 329,057 ÷ 930,549 = 0.35 — optically bad, actually a bargaining-power story.

Quick Ratio = (Current Assets − Inventories) ÷ Current Liabilities. The stringent version, dropping assets that can’t convert to cash immediately.

Efficiency ratios (how hard the assets work)

Accounts Receivable Turnover = Revenue ÷ Average Accounts Receivable. Higher = faster conversion of sales to cash; low = too-easy credit or collection trouble. Accounts Payable Turnover = Purchases ÷ Accounts Payable. Low ratio = long supplier credit — which could be bargaining power or inability to pay; hard to conclude alone. Good companies pay on time as much as they collect on time. Asset Turnover = Net Sales ÷ Total Assets. How many times assets are churned to generate revenue; idle assets are deployed capital earning nothing. Inventory Turnover = Sales ÷ Inventory. Higher = better; unconverted inventory is locked-up money (and perishables deteriorate). High for FMCG, low for capital goods.

DuPont analysis — the diagram that explains ROE

DuPont breaks ROE into three multiplicative components. As a “diagram” in one line:

ROE = Net Profit ÷ Equity = (Net Profit ÷ Sales) × (Sales ÷ Assets) × (Assets ÷ Equity)

That is: ROE = Net Profit Margin × Asset Turnover × Leverage (equity multiplier)

So ROE can rise for three different reasons — higher margin, higher efficiency, or higher leverage — and they are NOT equally good. Margin or efficiency improving is a reason to cheer; leverage rising is not necessarily, because leverage brings risk.

The workbook’s example nails it. HighLevCo and LowLevCo are similar-sized. HighLevCo: revenue 12,000, profit 2,400, assets 5,200, equity 2,600 (so liabilities 2,600) → ROE 92.3%. LowLevCo: revenue 11,800, profit 2,620, assets 5,000, all equity-funded → ROE 52.4%. HighLevCo looks like the star. But decompose: LowLevCo has the better margin (22% vs 20%) and marginally better asset turnover (2.4x vs 2.3x). HighLevCo’s entire ROE advantage comes from leverage (assets/equity of 2.0x vs 1.0x). Operationally, LowLevCo is the better performer — with less risk. That’s the whole point of DuPont: it tells you why an ROE is what it is.

Forecasting with ratios — and its limits

Ratio behaviour (fixed vs variable expenses, working capital as % of revenue) lets analysts project the future. But projection assumes the past fairly represents the future — which need not hold. The workbook’s caution: Suzlon was the only wind-turbine manufacturer with great pricing power before the mid-2000s; projecting its financials from history just as fierce domestic and offshore competition arrived would have been a blunder. Analysts must first think about how the future will differ from the past, then project.

Three quotes the workbook offers on projections, worth keeping: Buffett — “I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision… we care very much about, and look very deeply, at track records.” Munger — “Projections do more harm than good. They are put together by people who have an interest in a particular outcome… They remind me of Mark Twain’s saying, ‘A mine is a hole in the ground owned by a liar.'” Graham and Dodd — “While a trend shown in the past is a fact, a ‘future trend’ is only an assumption.”

Peer comparison

Company financials show past performance; comparing every ratio against industry peers shows competitive position. Databases give quick snapshots. Peer comparison is critical for any research report — and it’s why the industry-definition work of Chapter 6 mattered so much.

Equity expansion, dividends and insiders

History of equity expansion. Fund-raising affects shareholder value: funds raised at high cost are eventually borne by existing investors. Companies issue shares via rights issues, public issues (IPO/FPO), private placement (preferential issues, QIPs), warrant exercises, and ESOPs/sweat equity. Any issue other than rights dilutes existing shareholders’ ownership. The reading of each: growth financed by internal accruals raises no dilution concern. Rights issues cause little dilution (only for those who don’t exercise). Preferential allotment cuts both ways — dilution risk, but also a signal that certain investors could bail the company out in crisis; judge by the circumstances and the pricing (premium-priced preferential issues are value-accretive to minorities). QIPs dilute but signal institutional confidence in fundamentals. Since future dilution is unpredictable, the history of equity expansion is the guide to how the company will behave.

Dividend and earnings history. Dividends are one component of total returns (with capital gains). Context matters: growth-phase companies rightly pay little or nothing — they can earn more on the funds than shareholders expect; mature companies with declining incremental returns should pay timely dividends. For mature companies, look at predictability as much as yield — high-yield stocks attract income-seeking long-term investors. Mature companies in defensive industries offer the most predictable dividends, often paying interim dividends (Colgate Palmolive, Britannia). Some companies actively smooth dividends — building reserves in good years to pay through bad ones. Include buybacks in the study (they’re profit distribution too, sometimes tax-favoured, and give investors the choice to encash or increase stake). And read the signals: a well-performing company retaining more than usual may be planning a major investment — or bracing for a hard environment; a high-growth company raising its dividend may be signalling fewer growth opportunities. When dividend behaviour deviates sharply from the past, ask management why.

Insider transactions. Owners are closest to the business and best informed, and they trade under SEBI’s guidelines. The Peter Lynch quote the workbook uses: “Insiders can sell for a variety of reasons and it does not necessarily ring alarm bells, but if insiders are buying, then there can be only one reason — the company is likely to make huge profits in future.”

How this chapter is tested — with the worked case studies

Twelve marks, overwhelmingly numerical, and the direct source of exam case studies. The workbook’s own sample questions are a masterclass in what to expect, so let me work through the important ones.

The standalone MCQs: which items appear in an income statement (changes in inventory of finished goods and WIP — receivables and long-term debt changes are balance sheet/cash flow items); where borrowings appear in the cash flow statement (financing activities); which ratio measures short-term obligation capacity (current ratio).

The one everyone should memorise — sample question 4: P/E is 10, P/BV is 5, book value per share ₹15, 10,000 shares. Find ROE. The elegant route: P/BV = 5 means price = ₹75; P/E = 10 means EPS = ₹7.5; ROE = EPS ÷ book value = 7.5 ÷ 15 = 50%. The shortcut worth engraving: ROE = P/BV ÷ P/E. It converts a scary question into ten seconds.

Case study logic — the six-question sets. The exam gives you two-year summary financials for one or two companies and asks six things. The recurring computations, with the workbook’s own cases as examples:

Closing inventory from the “changes in inventory” line: opening finished goods 320; the 2XX9 expense line shows −35 (a negative expense = inventory built up). Closing = 320 + 35 = 355. Watch the sign convention.

EBITDA from a summary P&L: EBITDA = PBT + D&A + finance cost. Company A: 4,093.1 + 241.2 + 180.4 = 4,514.7 → margin 49.6% of 9,100. Company B: 2,929.6 + 218.6 + 195.2 = 3,343.4 → margin 44.4% of 7,524. Difference ≈ 518 bps.

Operating profit (EBIT): PBT + finance cost. Company B: 2,929.6 + 195.2 = 3,124.8.

DuPont in disguise: why is A’s ROE higher? Compute all three: A’s margin 30.4% vs B’s 26.1%; A’s asset turnover 1.94 vs 1.85; but A’s leverage (assets/equity) 1.54 vs B’s 1.67 — so A wins on higher margin and higher turnover despite LOWER leverage. The exam explicitly tests whether you check all three components rather than assume.

Capex from two balance sheets: capex = increase in fixed assets + depreciation = (2,412 − 2,407) + 241.2 = 246.2.

Growth extrapolation: revenue grew 9,100 ÷ 8,642 = 5.3%; next year ≈ 9,100 × 1.053 = 9,582.

Guided EBITDA forecast: prior margin 49.61%, minus 25 bps = 49.36%, on guided revenue 9,500 = ≈4,689.

Working capital increase: NWC ratio 2,275 ÷ 9,100 = 25%; at revenue 9,500, NWC = 2,375; increase = 100.

Interest after mid-year repayment: implied rate = 180.4 ÷ 1,640.5 ≈ 11%; repaying 200 mid-year means average debt ≈ 1,540.5; expected finance cost ≈ 172.

Closing equity: opening equity + profit − dividends = 3,046.6 + 3,200 − 900 − 1,000 = ≈4,347.

Look at that list again — it’s a complete recipe book for the case studies: EBITDA build-up, EBIT, margins in bps, DuPont decomposition, capex, growth rates, forecast mechanics, working capital, interest modelling, equity roll-forward. Every one is arithmetic on the P&L waterfall and the balance sheet.

My approach for this chapter: build one spreadsheet with a dummy two-year P&L and balance sheet, and practise computing every metric above until each takes under a minute — because the exam PCs have Excel/Calc, and the case sets are exactly this. Memorise cold: the ROE = P/BV ÷ P/E shortcut, the DuPont triple, total debt components, core working capital, the three audit report types, the control definition (>50% votes OR majority board), and the three cash flow streams with what sits in each. This chapter plus Chapter 10 is where the exam is won or lost.

Next up: Chapter 9 — Corporate Actions: dividends, splits, bonuses, buybacks and how each moves the share price. A lighter breather after this one. See you in the next note.

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Note: These are my personal study notes as I prepare for the NISM-Series-XV Research Analyst exam. They are for learning purposes only and are not investment advice.