IFMP Financial Analysts Certification Level 2, Pakistan flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

DuPont ROE identity

ROE equals net profit margin times total asset turnover times the equity multiplier. It separates profitability, efficiency, and leverage so an analyst can attribute a change in returns to its underlying driver.

Free cash flow to firm

FCFF equals EBIT times one minus the tax rate, plus depreciation, minus capital expenditure, minus the increase in net working capital. It is the cash available to all capital providers before financing flows.

Weighted average cost of capital

WACC weights after-tax cost of debt and cost of equity by their market-value proportions of total capital. Debt enters at Kd times one minus the tax rate because interest is tax-deductible.

Capital asset pricing model

CAPM states cost of equity equals the risk-free rate plus beta times the equity risk premium. Beta measures sensitivity to market returns; the risk-free rate should match the cash flow currency and horizon.

Cash conversion cycle

CCC equals days inventory outstanding plus days sales outstanding minus days payable outstanding. It measures how long cash is tied up in operations before collection from customers.

Accruals quality check

Compare cumulative net income with cumulative operating cash flow over several years. Operating cash persistently below net income suggests aggressive revenue recognition, receivable stretching, or capitalised operating costs.

Altman Z-score zones

The Z-score combines five weighted ratios covering liquidity, retained earnings, profitability, leverage, and sales productivity. Scores below 1.81 indicate distress risk; above 2.99 indicates a safe profile.

Piotroski F-score

Nine binary signals grouped into profitability, leverage and liquidity, and operating efficiency. A score of eight or nine signals strong fundamental momentum; two or below signals deterioration.

Fisher equation

One plus the nominal rate equals one plus the real rate times one plus inflation. In high-inflation economies, subtracting inflation linearly materially overstates the true real return.

Enterprise value to EBITDA

EV/EBITDA compares total capital value with pre-interest, pre-tax, pre-depreciation earnings. It is capital-structure and depreciation-policy neutral, making it useful for comparing leveraged peers.

Price to book rationale

P/B compares market value with accounting equity and is most meaningful for banks and insurers, where book value approximates marked-to-market net assets and earnings are volatile.

Gordon growth model

P0 equals next year's dividend divided by required return minus growth. It assumes perpetual constant growth below the discount rate, so terminal value is extremely sensitive to small assumption changes.

Modified duration

Modified duration estimates the percentage change in bond price for a one percent change in yield. It equals Macaulay duration divided by one plus yield per period.

Bond price convexity

The price-yield relationship is curved, so price gains from yield falls exceed price losses from equal yield rises. Duration alone underestimates price for large yield moves; convexity adjusts the estimate.

Interest coverage ratio

EBIT divided by interest expense. It shows how many times operating profit covers the interest bill; sustained low coverage signals refinancing risk, especially when rates are rising.

Net debt to EBITDA

Total interest-bearing debt minus cash, divided by EBITDA. It expresses leverage in years of operating earnings; levels above roughly 3.5 times often constrain refinancing capacity.

After-tax cost of debt

Kd multiplied by one minus the tax rate. Interest is deductible, so the government effectively subsidises part of the interest cost, lowering the true cost of debt capital.

Terminal value sensitivity

Terminal value dominates valuation in discounted cash flow models. Small changes in perpetual growth or discount rate swing value widely, so growth must stay below long-run nominal economic growth.

Quick ratio

Current assets excluding inventory, divided by current liabilities. It tests short-term solvency without relying on inventory liquidation, which may be slow or loss-making in a downturn.

Operating leverage

The percentage change in operating profit divided by the percentage change in sales. High fixed costs amplify profit swings, raising business risk and the discount rate applied to earnings.

Financial leverage effect

Leverage raises ROE when return on assets exceeds after-tax cost of debt, and lowers it otherwise. It also raises earnings volatility, so higher ROE from leverage is not automatically superior.

Economic value added

EVA equals net operating profit after tax minus WACC times invested capital. A positive EVA means the firm earned more than the opportunity cost of the capital it employed.

Dividend payout and retention

Retention ratio equals one minus payout ratio. Sustainable growth equals retention ratio times ROE, giving the growth rate financeable without new external equity.

Working capital turnover

Sales divided by average net working capital. Rising turnover indicates more revenue generated per rupee tied up in receivables, inventory, and payables; falling turnover signals deteriorating efficiency.

Common-size analysis

Express every income statement line as a percentage of sales and every balance sheet line as a percentage of total assets. It exposes structural shifts that absolute figures conceal across periods.

Real versus nominal cash flows

Discount nominal cash flows at nominal rates and real cash flows at real rates. Mixing the two produces systematically biased valuations; consistency of currency and inflation is mandatory.

Earnings before interest and tax

EBIT measures operating profit before financing costs and taxes. It is the numerator for coverage ratios and the starting point for unlevered free cash flow calculations.

Book value versus market value

Book value records historical cost net of depreciation; market value reflects expected future cash flows. Valuation multiples based on book value are unreliable where assets are old or intangible-heavy.

Sensitivity versus scenario analysis

Sensitivity varies one assumption at a time holding others constant; scenario analysis changes several assumptions together into coherent cases. Scenarios capture correlated risk; sensitivity isolates single drivers.

Credit rating migration

A downgrade raises the credit spread on new and refinanced debt, increasing interest cost and lowering valuation. Analysts track leverage and coverage trends to anticipate migration before it occurs.

Quality of earnings

The degree to which reported profit reflects sustainable operating cash generation rather than accounting choices. Recurring revenue and normalised expenses support quality; one-off gains undermine it.

Interest rate risk

The risk that bond prices fall when market yields rise. It is greater for longer maturities and lower coupons; duration quantifies the exposure for a portfolio of fixed-income securities.