Analysis
The Analysis domain tests whether you can read financial statements, build a defensible forecast, and convert it into a valuation or credit view. Questions focus on ratio interpretation, cash-flow drivers, WACC, DCF mechanics, and sensitivity analysis.
Financial statement links
A three-statement model ties net income to retained earnings, capex and working capital to cash flow, and debt to interest. Forecast revenue drivers explicitly; do not plug margins.
Ratios and DuPont
Liquidity: current and quick ratios. Leverage: debt/EBITDA and interest cover. Efficiency: inventory days and receivable days. Profitability: gross, EBIT, and net margins. DuPont: ROE = net margin × asset turnover × equity multiplier.
DCF
FCFF = EBIT(1−t) + D&A − capex − increase in NWC. Discount at WACC. Terminal value with Gordon growth: FCFF_(n+1)/(WACC−g). CAPM: cost of equity = risk-free + beta × equity risk premium.
Worked example: DuPont
Sales 2,000; net income 240; assets 1,600; equity 800. Net margin = 12%; asset turnover = 1.25×; equity multiplier = 2.0×. ROE = 12% × 1.25 × 2.0 = 30%. If leverage rises to 2.5× with unchanged margin and turnover, ROE becomes 37.5%, but financial risk rises; check interest cover before praising the improvement.
Traps
- Using EBITDA as free cash flow; it ignores capex, tax, and working capital.
- Terminal growth above WACC or above nominal GDP indefinitely.
- Mixing levered beta with unlevered cost of capital.
- Ignoring non-recurring items in normalized earnings.
- Circular interest in forecasts: interest depends on debt, which depends on cash flow.
Key discipline
Every forecast assumption should be traceable to a driver, and every valuation should include sensitivity to WACC and terminal growth.