IFMP Financial Analysts Certification Level 2, Pakistan cheat sheet

DuPont decomposition: ROE = net profit margin × asset turnover × equity multiplier. Isolate which driver moved before attributing a change in ROE to management performance.

Free cash flow to firm = EBIT × (1 − tax rate) + depreciation − capex − increase in net working capital. Discount at WACC; use FCFF when leverage is expected to change.

WACC = (E/V) × Ke + (D/V) × Kd × (1 − t). Ke via CAPM: Rf + β × equity risk premium. In Pakistan, use the 6-month T-bill or 10-year PIB yield as Rf, not a foreign rate.

Cash conversion cycle = DIO + DSO − DPO. A rising CCC funded by short-term borrowing raises effective interest cost; check it against the KIBOR-linked lending rate.

Earnings quality test: compare cumulative net income with cumulative operating cash flow over 3–5 years. Persistent OCF < NI signals accrual inflation, receivable stretching, or capitalised costs.

Altman Z-score (public manufacturers): 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5. Below 1.81 = distress zone; above 2.99 = safe zone. Recompute X5 with sales/net assets, not profit.

Piotroski F-score: nine binary signals across profitability, leverage/liquidity, and operating efficiency. Score ≥ 8 flags strong fundamental momentum; ≤ 2 flags deterioration.

Real return approximation (Fisher): (1 + nominal) = (1 + real)(1 + inflation). With Pakistani double-digit CPI, subtracting inflation linearly overstates real return materially.

Relative valuation: P/E is distorted by capital structure and one-off items; EV/EBITDA is capital-structure neutral; P/B suits financials where book value approximates mark-to-market equity.

Gordon growth: P0 = D1 / (r − g). Terminal value is hypersensitive to g; g must not exceed long-run nominal GDP growth, and r must exceed g for the model to be valid.

Bond price–yield relationship is convex: for a given yield change, the price gain exceeds the price loss. Duration measures first-order sensitivity; convexity corrects the estimate for large yield moves.

Macaulay duration ≈ modified duration × (1 + y/m). Modified duration estimates percentage price change per 1% yield change; use it for interest-rate risk on a TFC or PIB portfolio.

Credit analysis: interest coverage = EBIT / interest expense; net debt/EBITDA above 3.5× typically constrains refinancing in a high-rate environment. Cross-check with current ratio and quick ratio.

Cost of equity vs cost of debt: interest is tax-deductible, so after-tax Kd = Kd × (1 − t). Equity distributions are not deductible, which is why leverage lowers WACC up to the point distress costs dominate.

Sensitivity and scenario analysis: flex WACC, terminal growth, and margin assumptions independently. A valuation is only decision-useful if the ranking of options survives plausible parameter ranges.

Ratio comparability: restate for lease capitalisation and one-off gains before comparing peers; Pakistani FY-end (June) versus calendar-year peers creates seasonal mismatch in interim comparisons.