Research Analyst Qualification Exam

The 10-K is the annual report filed with the SEC, containing audited financial statements, management discussion and analysis (MD&A), risk factors, and business descriptions. The 10-Q is the quarterly report with unaudited financials. The 8-K reports material events such as acquisitions, executive changes, or earnings restatements.

The proxy statement (DEF 14A) discloses executive compensation, board composition, and items for shareholder vote. Form 4 reports insider transactions within two business days. Research analysts must understand these filings to extract critical data points, identify trends, and detect potential red flags in a company's financial reporting.

The DuPont analysis decomposes Return on Equity (ROE) into three components: profit margin (net income / revenue), asset turnover (revenue / total assets), and financial leverage (total assets / shareholders' equity). ROE = Profit Margin x Asset Turnover x Equity Multiplier.

This decomposition allows research analysts to identify what is truly driving a company's returns. A company with high ROE from high leverage carries more risk than one achieving similar ROE through operational efficiency (higher margins or asset turnover). Comparing DuPont components across peers reveals structural differences in business models and capital allocation strategies.

Earnings quality refers to the degree to which reported earnings reflect the true economic performance of a business and are sustainable over time. High-quality earnings are generated from core operations, are backed by actual cash flows, and result from consistent accounting policies.

Research analysts assess earnings quality by comparing operating cash flow to net income (the accrual ratio), examining changes in accounting policies, evaluating the proportion of non-recurring items, and scrutinizing aggressive revenue recognition practices. Red flags include growing receivables outpacing revenue growth, declining cash conversion, frequent one-time charges, and significant differences between GAAP and non-GAAP earnings.

Enterprise Value (EV) represents the total value of a firm to all capital providers -- both equity holders and debt holders. It is calculated as market capitalization plus total debt, preferred stock, and minority interest, minus cash and cash equivalents. EV-based multiples (EV/EBITDA, EV/Revenue) are capital-structure neutral, making them ideal for comparing companies with different leverage levels.

Equity Value (market capitalization) represents the value attributable to common shareholders only. Equity-based multiples (P/E, P/B) are affected by capital structure. A company with more debt will have a lower equity value relative to its enterprise value. Research analysts must be consistent -- matching EV-based metrics with enterprise-level cash flows and equity-based metrics with per-share earnings.

Scenario analysis is a framework used by research analysts to evaluate a range of potential outcomes. The base case represents the most likely scenario, reflecting consensus assumptions. The bull case assumes favorable conditions (stronger revenue growth, margin expansion, multiple expansion), while the bear case models downside risks (revenue decline, margin compression, competitive threats).

Each scenario produces a different valuation range, which helps investors understand the risk/reward profile of an investment. Analysts typically assign probability weights to each scenario. Effective scenario analysis identifies the key drivers that have the greatest impact on valuation and tests how changes in those drivers affect the outcome.

FINRA Rule 2241 and SEC Regulation AC (Analyst Certification) require extensive disclosures in research reports. Analysts must certify that the views expressed accurately reflect their personal opinions and disclose whether their compensation is tied to specific recommendations or investment banking revenue.

Required disclosures include: whether the analyst or firm owns securities of the covered company, whether the firm has received investment banking compensation from the company in the past 12 months, the firm's rating distribution (percentage of buy/hold/sell ratings), and a price chart showing the history of the analyst's ratings and price targets alongside the stock price. These disclosures are designed to help investors identify potential conflicts of interest.

Regulation FD (Fair Disclosure) requires that when a public company discloses material nonpublic information to certain individuals (including analysts and institutional investors), it must simultaneously disclose that information to the public. If the disclosure is unintentional, the company must make public disclosure promptly (within 24 hours or by the opening of trading the next day).

Information barriers (often called "Chinese walls") are policies and procedures that prevent the flow of material nonpublic information between different departments of a firm -- particularly between investment banking and research. These barriers ensure that research analysts maintain independence and that their recommendations are not influenced by the firm's investment banking relationships. FINRA Rule 2241 codifies many of these requirements.