You are reading the 2026 curriculum (exams up to November 2026). Sitting in February 2027 or later? Go to the 2027 Equities guide.

Learning Module 5 of Equity Investments 11–14% of the exam

Company Analysis: Past and Present

4 lessons. About 28 minutes in cram mode, 136 minutes in full.

Start with lesson 1 Learn with Sensei Read the module summary

Lessons

1
The company research report and the business model
describe 6 min cram, 28 min full
2
Revenue drivers and pricing power
evaluate 6 min cram, 32 min full
3
Operating profitability and working capital
evaluate 8 min cram, 40 min full
4
Capital investments and capital structure
evaluate 8 min cram, 36 min full

What the exam expects you to do

Describe the elements that should be covered in a thorough company research report.The company research report and the business model
Determine a company’s business model.The company research report and the business model
Evaluate a company’s revenue and revenue drivers, including pricing power.Revenue drivers and pricing power
Evaluate a company’s operating profitability and working capital using key measures.Operating profitability and working capital
Evaluate a company’s capital investments and capital structure.Capital investments and capital structure

Module summary

The whole module on one sheet, organised by lesson: what to memorize, how the ideas fit together, the formulas and the key terms. No paragraphs, just what you need to revise.

Hide what I know

How deeply to learn each part

Know the idea: Understand it in general. It frames other topics, but you will not calculate with it.
Use it: Understand it well enough to solve a question with it. Recognize when it applies.
Memorize: Learn it by heart. The exam will not give it to you.

The company research report and the business model

Known

MemorizeInitiation vs update report

Element	Initiation	Update
Front matter, recommendation	yes	yes, plus what changed
Company description, business model	yes, in depth	rarely
Industry, Five Forces, PESTLE	yes	rarely
Financial analysis and model	yes	actual vs expected, new forecasts
Valuation	yes, with scenarios	changes since last report
ESG, ownership, pay	yes	if relevant
Risks	yes	updated

Memory hook An initiation explains the company; an update explains what changed. Industry structure moves slowly, so it is analyzed when coverage starts.

Know it cold Five Forces or PESTLE in the report means an initiation. Actual vs expected quarterly results means an update.

MemorizeThe five business model questions

Element	Question
Product or service	What is sold?
Customers	To whom?
Sales channels	How are customers reached and served?
Pricing and payment	How much, and on what terms?
Resources, suppliers, partners	What does it buy and rely on?

Memory hook What, who, how it gets there, how much, and what it leans on.

Know it cold Many companies have a conventional model (retailer, miner): focus on where this one differs.

MemorizeAnalysis order

Memory hook Know the company, then its industry, then forecast, then value.

Know it cold Company (past and present) → industry and competitive → forecast → valuation. Forecasting never comes first.

Key terms

company research report Use it
initiation report Use it
update report Use it
financial model Know the idea
business model Memorize
sales channels Use it
information sources Use it
conventional business model Know the idea

The company and industry analysis framework

Company researchthree stages, always in this order

1. Company analysis: past and present Memorize the subject of this module
- Business model Memorize what the company is
- Revenue and its drivers Use it where sales come from
- Operating profitability and working capital Use it what it keeps and ties up
- Capital investments and capital structure Use it how the money is used and raised
2. Industry and competitive analysis Memorize structure, outside forces, competitive position
3. Forecasting, then valuation Memorize only after stages 1 and 2

Elements of a thorough initiation report

Initiation reportwritten for readers new to the company

Front matter Use it identifiers, recommendation, target price, disclosures
Recommendation Use it the call and the key reasons
Company description Use it business model, strategy, revenue and profit breakdowns
Industry overview and competitive position Use it
- Industry size, growth, profitability history and outlook
- Competitive analysis Porter's Five Forces
- External influences PESTLE (political, economic, social, technological, legal, and environmental)
- Company's position and strategy versus rivals
Financial analysis and model Use it drivers, forecasts, statements
Valuation Use it target price, key inputs, scenarios
ESG considerations Use it ownership, management, executive pay
Risks Use it material downside and upside

The five questions behind a business model

Business modelhow the company makes money

Product or service Memorize what is sold?
Customers Memorize to whom?
Sales channels Memorize how are customers reached and served?
Pricing and payment Memorize how much, on what terms?
Resources, suppliers and partners Memorize what does it buy and rely on?

Information sources, grouped by origin

Sources for the business modelgrouped by who produces them

The issuer Use it free if the company is public
- Filings annual and quarterly reports
- Earnings calls and investor events plus press releases
- Management and investor relations also site visits and the product itself
Public third parties Use it
- Industry white papers and government data economic and industry indicators
- News and social media general and industry-specific
Proprietary third parties Use it
- Sell-side and rating agency research paid or restricted
- Data platforms and consultancies often industry specific
The analyst's own research Use it
- Surveys, customer conversations, product tests commissioned or done directly

Revenue drivers and pricing power

Known

MemorizeRevenue formulas

Approach	Formula	Watch
Bottom-up	revenue = volume × price	compound growth: (1 + g_vol)(1 + g_price) − 1
Top-down	revenue = market size × share	same period and same measure in numerator and market
Share	share = revenue ÷ market size	size = revenue ÷ share

Memory hook Growth rates multiply, they do not add: 8% volume and 3% price is 11.24%, not 11%.

Know it cold Pricing power is proved by margins and volumes holding, not by price rises alone.

MemorizePrice taker or pricing power?

Feature	Price taker	Pricing power
Product	near-identical	differentiated
Entry	easy	barriers
Substitutes	many	few
Customers	switch easily	switching costs, loyal
Margins over time	cycle around cost of capital	hold or rise

Memory hook Ask: if I raised price, would customers walk? If yes, price taker.

Know it cold Test: price rises faster than costs, margins hold or rise, and volume keeps growing.

Key terms

revenue drivers Use it
bottom-up approach Use it
top-down approach Use it
market size Use it
market share Memorize
cannibalization Use it
pricing power Memorize
price taker Use it
commoditization Use it
low-cost producer Use it

Two ways to analyze revenue

Revenue analysisstart with the revenue line

Bottom-up approach Use it build revenue from drivers
- Volume × price per unit Memorize by product line, segment or region
- Check each driver stable or volatile; new or existing customers
Top-down approach Use it start from the market
- Market size × market share Memorize unserved share is potential
- Outside drivers such as gross domestic product (GDP) growth

Pricing power by market type

Can the company set prices?set by market structure and competitive position

Highly competitive: price taker Memorize price set by supply and demand
- Little differentiation near-identical products
- Low barriers to entry new rivals arrive
- Substitutes, no loyalty, low switching costs customers leave easily
- Exception: low-cost producer can earn above its cost of capital if the cost lead lasts
Less competitive: some pricing power Memorize monopolistic competition, oligopoly, monopoly
- Product differentiation brand, convenience, service
- Barriers to entry patents, scale, regulation
- Few economical substitutes little to switch to
- Switching costs and loyalty customers stay

Formulas

Revenue, bottom-up Use it

\text{Revenue} = \sum \text{volume} \times \text{price per unit}

Quick example

Segment A sells 3.0 million units at 20; segment B sells 1.2 million units at 35. 3.0 × 20 + 1.2 × 35 = 60 + 42 = 102.

On your calculator

(3×20)+(1.2×35)= 102

3ENTER20×1.2ENTER35×+ 102

ENTER enter (on the HP, puts the number on the stack)

Revenue growth from volume and price Memorize

g_{rev} = (1 + g_{vol})(1 + g_{price}) - 1

Quick example

Volume +12%, average price −2%. 1.12 × 0.98 − 1 = 9.76%. Adding the rates (10%) is the trap.

On your calculator

1.12×0.98−1= 0.0976

1.12ENTER0.98×1− 0.0976

ENTER enter (on the HP, puts the number on the stack)

Market share Memorize

\text{Market share} = \frac{\text{company revenue}}{\text{market size}}

Quick example

Revenue 360 in a market of 4,500 (same units, same period). 360 ÷ 4,500 = 8.0%. Rearranged, market size = revenue ÷ share.

On your calculator

360÷4500= 0.08

360ENTER4500÷ 0.08

ENTER enter (on the HP, puts the number on the stack)

Revenue, top-down Use it

\text{Revenue} = \text{market size} \times \text{market share}

Quick example

A market of 5,000 and a 12% share. 5,000 × 0.12 = 600. The unserved 88% is sales potential.

On your calculator

5000×0.12= 600

5000ENTER0.12× 600

ENTER enter (on the HP, puts the number on the stack)

Operating profitability and working capital

Known

MemorizeCost structure and leverage

Item	Formula	Note
Operating profit	Q × (P − VC) − FC	Q units, P price, VC per unit, FC total
Contribution margin	P − VC	per unit, before fixed costs
DOL	%Δ operating profit ÷ %Δ sales	or total contribution ÷ operating profit
More fixed costs	higher DOL	bigger gains in good years, bigger losses in bad

Memory hook Contribution is what a unit gives toward the bills; operating profit is what is left after all the bills.

Know it cold Break-even units = FC ÷ (P − VC). Change in profit ≈ DOL × change in sales.

MemorizeMargins and days

Measure	Numerator	Denominator
Gross margin	revenue − cost of sales	revenue
EBITDA margin	gross profit − opex excl. D&A	revenue
Operating margin	EBITDA − D&A = EBIT	revenue
DSO	receivables × 365	revenue
DIO	inventory × 365	cost of sales
DPO	payables × 365	cost of sales

Memory hook Receivables come from sales, so revenue. Inventory and payables come from buying, so cost of sales.

Know it cold CCC = DSO + DIO − DPO. Add what ties cash up, subtract what suppliers fund. Shorter frees cash.

Key terms

operating costs Use it
fixed costs Memorize
variable costs Memorize
contribution margin Memorize
degree of operating leverage Memorize
gross margin Memorize
EBITDA margin Memorize
operating margin Memorize
days sales outstanding Memorize
days of inventory on hand Memorize
days payables outstanding Memorize
cash conversion cycle Memorize
net working capital Use it

Three ways to classify operating costs

Operating costsmost of what a company spends

By behavior with output Memorize the one that drives operating leverage
- Variable Memorize materials, merchandise, per-unit labor
- Fixed Memorize salaried staff, depreciation, rent, software
By nature Use it what the cost is
- Employee pay, raw materials, office supplies
By function Use it what the cost is for
- Cost of sales, selling and marketing, general and administrative, R&D

The profit ladder and its three margins

Revenueeach step down removes a cost group

Minus cost of sales = gross profit Memorize gross margin; mostly variable costs
- Minus operating expenses excl. D&A = EBITDA Memorize EBITDA margin; selling, G&A, R&D mostly fixed
  - Minus D&A = operating profit (EBIT) Memorize operating margin; before interest and tax

Working capital measures

Working capitalcash tied up in day-to-day operations

Days sales outstanding Memorize receivables ÷ revenue × 365
Days of inventory on hand Memorize inventory ÷ cost of sales × 365
Days payables outstanding Memorize payables ÷ cost of sales × 365
Cash conversion cycle Memorize DSO + DIO − DPO
Net working capital Use it receivables + inventory − payables, as % of sales

Formulas

Operating profit Memorize

\text{Operating profit} = Q \times (P - VC) - FC

Quick example

A firm sells 2.0 million units at 12 with variable cost of 7 and fixed costs of 6.0 million. 2.0 × (12 − 7) − 6.0 = 4.0 million.

On your calculator

2×(12−7)−6= 4

12ENTER7−2×6− 4

ENTER enter (on the HP, puts the number on the stack)

Contribution margin per unit Memorize

\text{Contribution margin} = P - VC

Quick example

Price 12, variable cost 7. 12 − 7 = 5 per unit toward fixed costs and profit.

On your calculator

12−7= 5

12ENTER7− 5

ENTER enter (on the HP, puts the number on the stack)

Degree of operating leverage Memorize

DOL = \frac{\%\Delta \text{operating profit}}{\%\Delta \text{sales}}

Quick example

Sales rise 8% and operating profit rises 20%. 20 ÷ 8 = 2.5. A 2.5 DOL means each 1% change in sales moves operating profit about 2.5%.

On your calculator

20÷8= 2.5

20ENTER8÷ 2.5

ENTER enter (on the HP, puts the number on the stack)

DOL at a given output Use it

DOL = \frac{Q \times (P - VC)}{Q \times (P - VC) - FC}

Quick example

Total contribution 10.0, operating profit 4.0. 10.0 ÷ 4.0 = 2.5. Needs no second year of data.

On your calculator

10÷4= 2.5

10ENTER4÷ 2.5

ENTER enter (on the HP, puts the number on the stack)

Gross margin Memorize

\text{Gross margin} = \frac{\text{revenue} - \text{cost of sales}}{\text{revenue}}

Quick example

Revenue 500, cost of sales 320. (500 − 320) ÷ 500 = 36.0%.

On your calculator

500−320=÷500= 0.36

500ENTER320−500÷ 0.36

ENTER enter (on the HP, puts the number on the stack)

EBITDA margin Memorize

\text{EBITDA margin} = \frac{\text{EBITDA}}{\text{revenue}}, \quad \text{EBITDA} = \text{gross profit} - \text{operating expenses excluding D\&A}

Quick example

Gross profit 180, operating expenses excluding D&A 85, revenue 500. EBITDA = 95, so 95 ÷ 500 = 19.0%.

On your calculator

180−85=÷500= 0.19

180ENTER85−500÷ 0.19

ENTER enter (on the HP, puts the number on the stack)

Operating (EBIT) margin Memorize

\text{Operating margin} = \frac{\text{EBIT}}{\text{revenue}}, \quad \text{EBIT} = \text{EBITDA} - \text{D\&A}

Quick example

EBITDA 95, depreciation and amortization 30, revenue 500. EBIT (earnings before interest and taxes) is 65, so 65 ÷ 500 = 13.0%.

On your calculator

95−30=÷500= 0.13

95ENTER30−500÷ 0.13

ENTER enter (on the HP, puts the number on the stack)

Days sales outstanding Memorize

DSO = \frac{\text{receivables}}{\text{revenue}} \times 365

Quick example

Receivables 40, revenue 480. 40 ÷ 480 × 365 = 30.4 days.

On your calculator

40÷480×365= 30.42

40ENTER480÷365× 30.42

ENTER enter (on the HP, puts the number on the stack)

Days of inventory on hand Memorize

DIO = \frac{\text{inventory}}{\text{cost of sales}} \times 365

Quick example

Inventory 55, cost of sales 330. 55 ÷ 330 × 365 = 60.8 days. Cost of sales, not revenue.

On your calculator

55÷330×365= 60.83

55ENTER330÷365× 60.83

ENTER enter (on the HP, puts the number on the stack)

Days payables outstanding Memorize

DPO = \frac{\text{payables}}{\text{cost of sales}} \times 365

Quick example

Payables 33, cost of sales 330. 33 ÷ 330 × 365 = 36.5 days.

On your calculator

33÷330×365= 36.5

33ENTER330÷365× 36.5

ENTER enter (on the HP, puts the number on the stack)

Cash conversion cycle Memorize

CCC = DSO + DIO - DPO

Quick example

DSO 32, DIO 58, DPO 40. 32 + 58 − 40 = 50 days. Negative means suppliers fund the business.

On your calculator

32+58−40= 50

32ENTER58+40− 50

ENTER enter (on the HP, puts the number on the stack)

Net working capital as a share of sales Use it

\frac{\text{receivables} + \text{inventory} - \text{payables}}{\text{revenue}}

Quick example

Receivables 40, inventory 55, payables 33, revenue 480. 62 ÷ 480 = 12.9% of sales.

On your calculator

40+55−33=÷480= 0.1292

40ENTER55+33−480÷ 0.1292

ENTER enter (on the HP, puts the number on the stack)

Capital investments and capital structure

Known

MemorizeValue creation and financing risk

Measure	Formula	Reading
ROIC	EBIT × (1 − t) ÷ invested capital	unlevered return
Value created	ROIC > WACC	compare unlevered with WACC
DFL	%Δ net income ÷ %Δ EBIT = EBIT ÷ (EBIT − I)	fixed interest magnifies
Net debt ÷ EBITDA	(debt − cash) ÷ EBITDA	years to repay
Interest coverage	EBIT ÷ interest	how many times interest is covered
Total leverage	DOL × DFL	%Δ net income per %Δ sales

Memory hook Operating leverage is fixed costs in the business; financial leverage is fixed interest on the funding. Multiply them for the total swing.

Know it cold ROIC above WACC creates value. Match unlevered to unlevered: ROIC with WACC, never ROE with WACC.

MemorizeReading a sources and uses table

Memory hook Ask three questions: are operations paying for investment, is debt filling a gap, is cash going back to owners?

Know it cold Operations ≈ payouts while capex is funded by new debt → leverage is rising.

Key terms

sources and uses of capital Use it
return on invested capital Memorize
weighted average cost of capital Use it
degree of financial leverage Memorize
net debt to EBITDA Use it
interest coverage Use it
DuPont analysis Use it

Sources and uses of capital

Capital over a periodsources always equal uses

Sources Use it where the money came from
- Cash flow from operations including negative net working capital
- Cash and investments on hand drawing down the balance
- Debt issuance
- Equity issuance
- Asset disposals
Uses Use it where it went
- Capital expenditures and additions to intangibles
- Acquisitions
- Increase in net working capital
- Debt repayment
- Dividends and share repurchases

Measuring financing risk

Is the capital structure risky?unlevered returns versus what leverage adds

Leverage ratios Use it how much debt
- Net debt to EBITDA Use it years of earnings to repay
Coverage ratios Use it can earnings pay the interest
- Interest coverage Use it EBIT ÷ interest expense
Sensitivity Memorize
- Degree of financial leverage Memorize %Δ net income ÷ %Δ operating income
Third-party view
- Credit ratings from rating agencies

From return on capital to return on equity

ROElevered return to shareholders

Net margin net income ÷ revenue
Asset turnover revenue ÷ assets
Equity multiplier Use it assets ÷ equity; leverage

Formulas

Return on invested capital Memorize

ROIC = \frac{NOPAT}{\text{invested capital}}, \quad NOPAT = EBIT \times (1 - t)

Quick example

Earnings before interest and taxes (EBIT) 90, tax rate 20%, invested capital 600. Net operating profit after tax (NOPAT) = 72, so 72 ÷ 600 = 12.0%. Compare with WACC, not with the cost of equity.

On your calculator

90×(1−0.2)÷600= 0.12

90ENTER1ENTER0.2−×600÷ 0.12

ENTER enter (on the HP, puts the number on the stack)

Value created Use it

\text{Spread} = ROIC - WACC

Quick example

ROIC 12.0%, WACC 9.5%. 12.0 − 9.5 = +2.5 points: value is created. A negative spread destroys value.

On your calculator

0.12−0.095= 0.025

0.12ENTER0.095− 0.025

ENTER enter (on the HP, puts the number on the stack)

Degree of financial leverage Memorize

DFL = \frac{\%\Delta \text{net income}}{\%\Delta \text{operating income}}

Quick example

Operating income rises 10% and net income rises 14%. 14 ÷ 10 = 1.4.

On your calculator

14÷10= 1.4

14ENTER10÷ 1.4

ENTER enter (on the HP, puts the number on the stack)

DFL at a given EBIT Memorize

DFL = \frac{EBIT}{EBIT - I}

Quick example

EBIT 70, fixed interest 20. 70 ÷ (70 − 20) = 1.4. Taxes cancel when the rate is constant.

On your calculator

70÷(70−20)= 1.4

70ENTER70ENTER20−÷ 1.4

ENTER enter (on the HP, puts the number on the stack)

Total leverage Use it

\%\Delta \text{net income} = DOL \times DFL \times \%\Delta \text{sales}

Quick example

Degree of operating leverage (DOL) 2.5, DFL 1.4, sales +6%. 2.5 × 1.4 × 6% = 21% on net income.

On your calculator

2.5×1.4×6= 21

2.5ENTER1.4×6× 21

ENTER enter (on the HP, puts the number on the stack)

Net debt to EBITDA Use it

\frac{\text{debt} - \text{cash and investments}}{EBITDA}

Quick example

Debt 450, cash 90, EBITDA 150. (450 − 90) ÷ 150 = 2.4 times: about 2.4 years of EBITDA to repay net debt.

On your calculator

450−90=÷150= 2.4

450ENTER90−150÷ 2.4

ENTER enter (on the HP, puts the number on the stack)

Interest coverage Use it

\text{Interest coverage} = \frac{EBIT}{\text{interest expense}}

Quick example

EBIT 70, interest 20. 70 ÷ 20 = 3.5 times.

On your calculator

70÷20= 3.5

70ENTER20÷ 3.5

ENTER enter (on the HP, puts the number on the stack)

DuPont decomposition of ROE Use it

ROE = \frac{NI}{\text{revenue}} \times \frac{\text{revenue}}{\text{assets}} \times \frac{\text{assets}}{\text{equity}}

Quick example

Net margin 5%, asset turnover 1.2, equity multiplier 2.0. 0.05 × 1.2 × 2.0 = 12.0%.

On your calculator

0.05×1.2×2= 0.12

0.05ENTER1.2×2× 0.12

ENTER enter (on the HP, puts the number on the stack)

Cheat sheet · PDF · 5 A4 pages

Company Analysis: Past and Present on 5 pages

What to memorize, the concept maps, every formula with a worked example and keystrokes for the TI BA II Plus and HP 12C, how each idea is asked, and the traps. Print it, or keep it on your phone.

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