I85PREP
⌘ K
CPA PEP Finance Elective study materials
CPA PEP Finance Elective study resources

CPA PEP Finance Elective: Financial Analysis, Performance Measurement, and Forecasting

CPA PEP Finance Elective · Work through your exam, one topic at a time.

All guide sections

Financial Analysis, Performance Measurement, and Forecasting

This domain tests whether you can convert statements into a decision: decompose returns to see where they come from, test the quality of earnings, build a driver-based forecast, and explain variances rather than just compute them.

Core rules

  • DuPont: ROE = net profit margin × asset turnover × equity multiplier. Each factor points to a different lever - pricing and cost, asset efficiency, or financing.
  • Pair a flow (income statement) with a stock (balance sheet) using average balances; use ending balances only when averages are unavailable, and say so.
  • ROIC = NOPAT / invested capital (debt plus equity less excess cash). Compare with WACC: EVA = (ROIC − WACC) × invested capital. Positive EVA is value creation; EPS growth alone is not.
  • Cash conversion cycle = days inventory outstanding + days sales outstanding − days payable outstanding. A lengthening cycle consumes cash even while profit grows.
  • Sustainable growth rate = ROE × (1 − dividend payout); growth beyond it requires new external capital or a change in the operating ratios.
  • Quality of earnings: compare accruals with operating cash flow, scrutinize capitalized costs, revenue pulled forward at period end, and "adjustments" that recur every year.
  • Forecast from drivers (volume × price, headcount, capex as a percentage of revenue), keep the balance sheet articulating, and sensitize the two or three assumptions that actually move value.

Worked example - same ROE, different quality

Company A: margin 5%, turnover 2.0, leverage 2.5 → ROE 25%. Company B: margin 10%, turnover 2.0, leverage 1.25 → ROE 25%. Identical headline returns, different risk. If A's margin slips one point to 4%, ROE falls to 20%; B would have to fall to 8% to suffer the same decline. The decomposition tells you which assumption to stress in the forecast and which covenant will bind first.

Traps that cost marks

  • Mixing market and book values inside one ratio.
  • Comparing pre-IFRS 16 periods with post-IFRS 16 periods without adjusting EBITDA and debt.
  • Accepting adjusted EBITDA that adds back recurring cash costs such as restructuring or share-based compensation.
  • Forecasting revenue growth with no balance-sheet consequence (receivables, inventory, capex).