Company analysis from history to scenarios

Learning goals

• Explain normalize history using mechanisms and limitations.
• Explain diagnose economics using mechanisms and limitations.
• Explain forecast with discipline using mechanisms and limitations.

Draft · approximately 25 minutes, excluding further revision.

Normalize history

Historical analysis separates recurring operations from exceptional gains and changes in consolidation; keep reported and adjusted numbers reconciled rather than silently replacing them.

A business description should identify customers, segments, geography, competitive position and revenue drivers before selecting valuation inputs.

Diagnose economics

Compare margins and asset efficiency across time and defensible peers; a ratio change needs an operational explanation and accounting context.

ROE can be decomposed into net margin, asset turnover and equity multiplier; higher leverage can raise ROE without improving operating profitability.

Forecast with discipline

Forward analysis links industry conditions to issuer-specific pricing, volumes, investment and financing; distinguish management targets from independent forecasts.

Monitor thesis-changing indicators, disconfirming evidence and risks to valuation; a successful past business can still be overpriced today.

Revenue growth and pricing power can move differently

Revenue equals volume×netprice, then mix and currency effects must be reconciled. Test operating leverage with variable and fixed costs rather than assuming every price increase lifts profit. A price increase can reduce volume; discounts, returns and channel incentives can make headline price differ from realized revenue. Compare revenue drivers with margins and customer retention.

A fictional firm initially sells 1,000 units at 10, variable cost 6/unit, fixedcost 2,000: operatingprofit 2,000. It then sells 900 units at 11 with unchangedunitcost and fixedcost: revenue 9,900, profit 2,500. Revenue falls 1% but operatingprofit rises 25%. This supports a conditional pricing-power analysis; it does not establish future customer retention or justify extrapolating the profit growth forever.

Formula and assumptions

ROE=net margin×asset turnover×equity multiplier

Original applied case: Company analysis from history to scenarios

1. Net margin 8%, asset turnover 1.5 and equity multiplier 2 apply to compatible average balances.
2. DuPont ROE=0.08×1.5×2=24%.
3. If only leverage rises, identify the additional financial risk instead of calling the full improvement operating skill.

Errors to catch

• Do not assume: Adjusted earnings need no reconciliation.
• Do not assume: Company analysis starts and ends with the ticker.
• Do not assume: A ratio explains its own cause automatically.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.cfainstitute.org
• Reference · www.investor.gov