A research analyst turns economic, industry and company evidence into a supported view of an equity security, then communicates that view under rules designed to manage conflicts and protect investors. The work has two connected parts. Series 86 covers collecting information, checking company data, forecasting and valuation. Series 87 covers preparing research reports and presenting or distributing research. Start by asking what drives a business: demand, prices, costs, investment and financing. Then trace those drivers through the financial statements and test how sensitive a valuation is to its assumptions. Finally, consider who receives the research, what interests must be disclosed and how a communication changes when it moves from a draft to a public statement.
Series 86 / Part 1 - Function 1: Information and Data Collection
1. Read economic indicators in context
Start by asking what an indicator measures, whether it is rising or falling, and when its effects are likely to reach customers. A level describes the present position: a high unemployment rate may constrain spending even after it begins to improve. Direction shows the change, while timing matters because income can support purchases now and job losses can weaken them later. Government statistics also differ in scope. Real disposable income measures household purchasing power after inflation; a national figure may conceal weakness among an industry's particular buyers. Consumer confidence describes sentiment rather than completed purchases. For equity research, connect each series to a revenue driver such as customer count, purchase frequency or average spending. Compare several indicators with company orders and industry data before changing a forecast. The FINRA content outline identifies macroeconomic data and industry drivers within Series 86.
Worked example: Suppose real disposable income rises 2% over a year while unemployment rises from 4% to 5%. Greater current purchasing power could support household-goods sales, but the one percentage point rise in unemployment raises concern about next quarter's customer base. The analyst might keep the current sales estimate while testing a weaker employment scenario for the next quarter. Neither statistic proves what this company's customers will buy.
Watch the distinction: Treating a favorable income figure as a sales forecast ignores who received the income and when they spend it. Rising unemployment could affect future demand despite current purchasing power.
Reference: [2]
2. Trace market forces to company results
A market change reaches a company through specific exposures, so map the path before deciding whether it helps or hurts. A stronger domestic currency can reduce the reported value of foreign sales, yet it may also lower the cost of imported inputs. Higher interest rates can raise floating-rate interest expense, discourage customers who borrow to purchase, and change investors' required returns. Input prices affect margins according to contract terms, inventory timing and the company's ability to change its own prices. Separate revenue, operating costs and financing costs in the model rather than assigning one broad effect to the entire business. Check the currency in which each item is earned or paid and whether hedges delay the effect. Finally, distinguish a temporary translation change from a lasting change in local demand.
Worked example: An exporter earns $100 million in translated foreign revenue and pays $60 million in domestic operating costs, leaving $40 million of operating contribution. A currency move reduces translated revenue by 5%, or $5 million, while those costs stay fixed. Contribution becomes $95 million minus $60 million, or $35 million. The $5 million decline is 12.5% of the original $40 million contribution, before hedges or other effects.
Watch the distinction: A 5% revenue decline does not imply a 5% profit decline. When domestic costs do not move with translated sales, the smaller contribution base makes profit more sensitive.
Reference: [2]
3. Analyze fiscal policy transmission
Fiscal policy can affect an industry through government purchases, transfers, or taxes, and each route has a different forecasting chain. Direct purchases may create orders for contractors and suppliers, but an announcement is not the same as funded work, awarded contracts or recognized revenue. Tax changes alter private households' or firms' after-tax resources; their spending response depends on who benefits and whether they save or invest the difference. Build a sequence from authorization to funding, procurement, delivery and payment. Test whether a covered company can bid, has enough capacity and is likely to win share. Separate a one-time program from recurring demand, since a temporary sales increase may not support a permanently higher earnings multiple. Budget timing and implementation delays belong in forecast scenarios rather than in a single certain estimate.
Worked example: Assume an announced program describes 200 projects, each worth $1 million, but 30% is funded for the forecast year. Near-term program demand is 200 × $1 million × 30% = $60 million. If the supplier can serve only part of that market, its expected revenue is lower still. The remaining $140 million of announced projects should not be booked into this year's addressable demand without funding.
Watch the distinction: Using the full announced program as current sales confuses policy intent with funded demand. A supplier must also win work and deliver it before recognizing revenue.
Reference: [2]
4. Analyze monetary policy transmission
A policy-rate move can pass through several channels at different speeds. Floating-rate borrowers may see interest expense change as their contracts reset; fixed-rate borrowers may feel little immediate cash effect but face higher refinancing costs later. Lenders can tighten credit terms, reducing customers' ability to finance homes, equipment or other purchases. Slower demand then reaches company revenue with a lag. For valuation, a higher required return reduces the present value of future cash flows, especially when much of the estimated value comes from distant years. Do not apply one mechanical rate change to every company. Check debt type, hedge arrangements, maturity dates, customer financing needs and the assumptions embedded in the discount rate. Monetary policy may also respond to changing economic conditions, so observed correlations alone do not establish cause.
Worked example: A company has $400 million of floating-rate debt. If its borrowing rate rises by one percentage point and the change passes through fully for a year, extra interest is $400 million × 0.01 = $4 million. That calculation leaves operating profit unchanged. Sales of financed products might weaken later, and a higher discount rate could lower estimated equity value before that weakness appears in reported revenue.
Watch the distinction: Applying the rate increase to all debt immediately overstates the cash effect if some borrowing is fixed or hedged. Ignoring customer credit and valuation misses other transmission channels.
Reference: [2]
5. Separate secular, cyclical and geographic trends
Classify a trend by what drives it and how long it could persist. A secular trend, such as an aging customer base, can reshape demand across economic cycles. A cyclical trend moves with conditions such as employment, credit or industrial production. A geographic trend may reflect genuine local purchasing changes, currency translation, or both. Keep units, local-currency sales and reported home-currency sales separate: each answers a different question. Then ask whether price, product mix and market share changed. International expansion can lift unit volume while a weaker foreign currency depresses reported revenue, so the two figures need not move together. For a forecast, model local operations first and translate them using an explicit currency assumption. Avoid projecting a temporary exchange-rate effect as a permanent change in customer demand.
Worked example: In a simplified market, local unit sales grow 6% and prices and mix stay constant, so local-currency sales also grow 6%. Reported dollar sales grow only 1%. The growth-rate gap is five percentage points; the implied currency translation factor is 1.01 ÷ 1.06 − 1, or about −4.72%. Local demand expanded despite modest reported growth. The calculation does not establish what the exchange rate will do next.
Watch the distinction: Reading 1% reported growth as stalled local demand overlooks translation. Conversely, a favorable currency move can make reported growth look strong even when local units are flat.
Reference: [2]
6. Size an industry market
Market sizing begins with a clearly defined buyer and product, then multiplies eligible buyers by purchases per buyer and price per purchase over the same period. Check whether buyers can purchase more than one product, whether the estimate counts replacement as well as first-time demand, and whether prices vary across segments. This produces a broad sales opportunity, not a company's automatic revenue. Narrow it for geography, distribution access, affordability and competing products before estimating attainable share. State whether share is measured in units or dollars; different product prices can make those shares diverge. Reconcile the resulting market estimate with observable industry sales where possible. The Series 86 study guide can help organize market sizing alongside the other Part 1 analytical topics.
Worked example: A hypothetical market has 2 million eligible buyers, each buying three units yearly at $40 per unit. Annual unit demand is 6 million; sales opportunity is 6 million × $40 = $240 million. At 10% unit share and the same $40 price, a firm sells 600,000 units for $24 million. If its channels reach only some eligible buyers, that share assumption needs further support.
Watch the distinction: Multiplying a large population by a price without defining purchase frequency inflates the market. A company's attainable sales also depend on access and share, not eligibility alone.
Reference: [2]
7. Measure capital intensity
Capital intensity describes how much operating investment a business needs to produce sales. Compare revenue with assets employed, then examine how much new investment growth requires. Asset turnover equals sales divided by operating assets; a lower figure means more assets are tied up per dollar of sales. To judge returns, pair turnover with a consistent operating margin: operating profit divided by operating assets equals operating margin multiplied by asset turnover. A business with slow turnover can still earn attractive returns if its margin is sufficiently high, but maintenance spending and future capacity expansion may limit cash available to investors. Distinguish accounting asset values from replacement costs, and check whether leased assets, working capital or outsourced production change the comparison. Growth is most valuable when incremental returns exceed the capital needed to produce it.
Worked example: Two firms each sell $500 million. Firm A uses $250 million of operating assets, so turnover is 2.0; Firm B uses $1 billion, so turnover is 0.5. If A earns a 10% operating margin, its operating return on assets is 10% × 2.0 = 20%. B needs a 40% margin at 0.5 turnover to match that return, assuming comparable asset measures.
Watch the distinction: Equal sales growth does not imply equal cash returns. A company that must build expensive capacity may need a much larger margin to earn the same return on investment.
Reference: [2]
8. Dissect growth by product
An industry's revenue growth can come from more units, higher prices, or a shift toward products with different prices. Calculate each product's units times selling price, then add the products rather than relying on a single average price. Hold prices constant to isolate unit and mix effects; hold units constant to examine price effects. Mix matters because a premium product may raise revenue even when total unit growth is modest, but its contribution margin may differ from its price premium. Check whether a new offering replaces existing sales or expands the market. For a company forecast, map product growth to production capacity, distribution and demand instead of assuming every segment grows at the same rate. A useful interpretation states both what changed and whether the change is likely to improve operating profit.
Worked example: A sector initially sells 100 basic units at $10 and 20 premium units at $30: $1,000 + $600 = $1,600. Next year it sells 100 basic and 30 premium units at unchanged prices: $1,000 + $900 = $1,900. Revenue increases $300, or $300 ÷ $1,600 = 18.75%. The added premium units drive the increase; prices did not rise.
Watch the distinction: Calling the 18.75% increase a price gain misidentifies the driver. Constant product prices can coexist with a higher average selling price when premium products become a larger share.
Reference: [2]
9. Model supplier dynamics
Supplier analysis connects input availability and price to a producer's output and margin. A supply curve shows how much of an input suppliers will offer at different prices, given their costs and capacity. If supply contracts or disruptions reduce available quantity, the price needed to secure material can rise. The analyst should identify input usage per finished unit, contracted versus spot purchases, substitutes, inventory buffers and supplier concentration. A cheap quote has limited value when that supplier cannot deliver the necessary volume or quality. Rising costs reach reported results according to inventory flow and purchase timing, while a production shortfall may reduce revenue as well as margin. Model both a price case and a quantity case, then test whether the company can pass costs through to customers without losing demand.
Worked example: A producer makes 1 million finished units and uses two input units for each, requiring 2 million input units. Input price rises from $8 to $11, a $3 increase. With unchanged usage and output, annual input cost rises by 2 million × $3 = $6 million. If only one supplier can deliver the full quantity, a cheaper small-volume quote does not remove the capacity risk.
Watch the distinction: Comparing supplier prices alone overlooks deliverable volume and reliability. An input shortage can reduce finished-unit sales even if the analyst has correctly calculated the per-unit cost increase.
Reference: [2]
10. Test pricing flexibility
Pricing flexibility is the ability to raise a selling price while retaining enough demand and contribution to improve results. Begin with contribution per unit, selling price minus variable cost, and multiply by expected units. Then test how many units might be lost after a price increase. Revenue alone can mislead: it may rise while contribution falls if variable costs climb or volume drops sharply. Customer switching costs, competitors' spare capacity, product differentiation and contract terms help assess plausible demand sensitivity. Fixed costs do not usually change with a small volume move, but a larger change may require additional capacity or leave facilities underused. Use a break-even volume calculation to discipline the forecast: divide the original total contribution by the proposed new contribution per unit to find the minimum units needed to preserve it.
Worked example: At 1,000 units sold for $100 with $60 variable cost each, contribution is 1,000 × $40 = $40,000. Raise price 10% to $110 and assume volume falls to 900 while unit variable cost stays $60. New contribution is 900 × $50 = $45,000, a $5,000 gain before fixed costs. Break-even volume at the new price is $40,000 ÷ $50 = 800 units.
Watch the distinction: Assuming every price increase improves profit ignores lost units and possible cost changes. The relevant test is total contribution after customers respond, followed by any fixed-cost effects.
Reference: [2]
11. Connect customer demand to product profit
Customer growth creates value only when the cash earned from customers can cover service and acquisition costs over a realistic lifetime. Calculate contribution per customer as revenue less costs that vary with serving that customer. Multiply by the active customer base to find periodic contribution, then compare the amount spent to acquire the cohort. A simple payback period divides acquisition cost by periodic contribution, assuming retention and contribution remain constant. That assumption is often optimistic: churn, discounts, payment losses and support costs can reduce realized cash. Demand sensitivity matters too, because raising prices may increase contribution per remaining subscriber while driving others away. Examine cohorts rather than only total subscriber counts; rapid additions can hide weak economics if new customers are expensive to acquire or leave quickly.
Worked example: A service adds 5,000 subscribers paying $20 monthly and incurs $18 monthly service cost per subscriber. Monthly contribution is 5,000 × ($20 − $18) = $10,000. Acquisition spending for the cohort is $150,000, so simple payback is $150,000 ÷ $10,000 = 15 months. That result requires the cohort and $2 per-subscriber contribution to persist without additional costs.
Watch the distinction: A large subscriber count is not proof of profit. If customers leave before acquisition spending is recovered, reported growth can accompany poor cohort economics.
Reference: [2]
12. Assess entry, disruption and regulation
New entrants, substitute products and regulatory changes can alter different parts of an industry model. An entrant may take units from incumbents, force lower prices or increase selling expense. A substitute can shrink demand for the existing product even if no direct competitor gains share. Regulation may add compliance costs, constrain supply, change permitted pricing or create demand for a new offering. Translate each proposed change into units, price, variable cost, fixed cost or required capital; then avoid counting the same effect twice. Lost revenue does not generally equal lost operating profit, because the company also avoids variable costs on units it no longer sells. Test the speed of customer switching and whether contracts protect near-term sales. Distinguish a plausible scenario from a forecast supported by observed orders, capacity and customer behavior.
Worked example: An incumbent has $200 million sales and a 15% operating margin, yielding $30 million operating profit. An entrant takes 10% of volume at unchanged prices, so lost sales are $20 million. If those sales carried a 40% contribution margin and fixed costs remain, lost contribution is $8 million. Operating profit becomes $22 million, a decline of about 26.7%.
Watch the distinction: Subtracting all $20 million of lost sales from profit ignores avoided variable costs. Assuming profit falls only 10% ignores that fixed costs remain while contribution disappears.
Reference: [2]
Series 86 / Part 1 - Function 2: Data Verification and Analysis
13. Verify financial trends across filings
Before calling a financial trend organic, put the periods on a comparable basis. Check the annual filing against interim reports for changes in accounting methods, segment definitions, fiscal period length and acquisitions or disposals. Calculate reported growth first, then identify the portion added by a transaction and estimate growth in the comparable continuing business. Quarterly comparisons can be distorted by seasonality, so use the same quarter a year earlier or a trailing period when appropriate. Reconcile management's adjusted figures to reported statements and read the notes for the dates and scope of acquired revenue. A useful verification question is whether revenue, margins and cash collection tell a consistent story. Strong sales growth with rising receivable days may reflect slower collections. Work through the distinctions with Series 86/87 practice questions.
Worked example: A hypothetical issuer's sales rise from $800 million to $920 million, an increase of $120 million, so reported growth is $120 million ÷ $800 million = 15%. The new figure includes $80 million from an acquired business. Assuming no other comparability changes, continuing-business sales are $840 million and growth is ($840 million − $800 million) ÷ $800 million = 5%. Both rates answer different questions.
Watch the distinction: Describing the full 15% as operating growth assigns acquired sales to the preexisting business. Check transaction dates and comparable periods before inferring demand acceleration.
Reference: [2]
14. Understand the reporting entity
A consolidated statement can include assets, liabilities and earnings of subsidiaries that the parent does not own completely. The analyst must identify whose claim a valuation represents. Enterprise value describes the operating business before allocating value among financing providers and outside owners. To estimate value attributable to the parent's common shareholders, subtract debt and other claims included in the consolidated business value, account for noncontrolling interests, and add any excess cash consistently. Inspect the legal structure: debt at a subsidiary may have different recourse than debt at the parent, and joint ventures may be accounted for without full consolidation. Likewise, a large reported profit may include earnings attributable to minority owners. Match the numerator and denominator in each valuation ratio, and check whether any investment has been counted twice.
Worked example: Suppose a consolidated operating business is valued at $1 billion. It has $200 million of debt and a $100 million noncontrolling ownership interest, with no excess cash or other claims. Value attributable to parent shareholders is $1 billion − $200 million − $100 million = $700 million. Stopping after debt would produce $800 million and overstate the parent's claim by $100 million.
Watch the distinction: Consolidation does not mean the parent owns every dollar of subsidiary value. Ignoring outside owners can inflate equity value even when the enterprise valuation is sound.
Reference: [2]
15. Map the supply chain to margin risk
Map a product from raw material to customer and mark where prices can change. Identify major suppliers, geographic dependencies, contract lengths, minimum purchase commitments and the company's ability to switch inputs. A fixed-price purchase contract can delay an input shock; a spot purchase reflects it sooner. On the revenue side, a matching customer contract or surcharge may permit cost recovery, while fixed selling prices can compress margins. Compare the duration of purchase protection with the duration of sales commitments so the forecast does not assume permanent insulation. Also ask whether an input shortage would cut output rather than merely raise cost. Inventory on hand can delay both effects in reported cost of goods. The decision sequence is exposure, timing, pass-through, volume response and resulting operating profit.
Worked example: A manufacturer has $300 million of annual cost of goods. Fixed-price contracts cover 60%, or $180 million, leaving $120 million exposed to spot prices this year. If the spot input price rises 10% and quantities and all other costs remain unchanged, added cost is $120 million × 10% = $12 million. Gross profit falls $12 million unless selling prices or other savings offset it.
Watch the distinction: Applying the spot increase to all $300 million overstates this year's exposure. Treating fixed contracts as permanent protection overlooks what happens when they expire.
Reference: [2]
16. Reconcile the three statements
The income statement measures performance under accrual accounting; the cash-flow statement explains why cash changed; the balance sheet records assets, liabilities and equity at a date. Begin with net income, add noncash expenses such as depreciation, then adjust for operating working capital. An increase in receivables usually uses cash because revenue was recognized before collection. Capital spending is an investing cash outflow that adds or improves assets, with depreciation affecting later income statements. Debt proceeds and repayments belong to financing cash flow. Use the ending cash balance as a check: beginning cash plus operating, investing and financing flows should equal ending cash, allowing for other reported items. For company analysis, free cash flow is commonly operating cash flow less capital spending, but state the definition used and avoid treating it as net income.
Worked example: A firm reports $50 million net income and $15 million depreciation. Receivables rise $10 million, with no other operating cash adjustments assumed. Operating cash flow is $50 million + $15 million − $10 million = $55 million. After $25 million capital spending, free cash flow is $30 million. Receivables tie up cash; depreciation lowers accounting income without using cash in the period.
Watch the distinction: Adding depreciation and stopping there would overstate operating cash flow because customers have not paid the extra receivables. Capital spending must also be considered before estimating free cash flow.
Reference: [2]
17. Test a business plan against execution
Turn a business plan into an operating bridge that can be checked against evidence. For a store expansion, separate locations opened, time open, sales per mature location, ramp-up speed and operating costs. A target for added annual sales may refer to a future run rate rather than revenue recognized in the current year. Compare actual openings with the schedule and ask whether construction, staffing, inventory and customer demand support the remaining pace. Management quality is visible partly in whether earlier milestones and budgets were met, but a missed date needs an economic explanation rather than an automatic judgment. Forecast multiple cases when execution depends on several steps. Keep the base case tied to observed productivity and capacity; show explicitly what extra openings or higher per-store sales the target requires.
Worked example: A company targets 100 new stores and $200 million of added annual sales. By midyear, 40 stores are open, each at a $1.5 million annual sales run rate. Together they imply 40 × $1.5 million = $60 million a year at that rate, not $60 million already earned. The remaining $140 million target requires more openings, higher productivity or both, with time to ramp.
Watch the distinction: Annualizing a midyear run rate as current-year recognized revenue overstates sales. Opened stores may also need time before reaching the productivity assumed in the plan.
Reference: [2]
18. Judge capacity and capital spending
Capacity sets a physical ceiling on a volume forecast unless the company adds equipment, shifts, outsourcing or productivity. Express capacity and demand in the same units and period, then calculate utilization as output divided by available capacity. High utilization may support pricing but can leave little room for maintenance or demand spikes. Distinguish capital spending that preserves existing output from expansion spending that raises the ceiling. An expansion forecast should include installation time, startup losses, financing needs and the possibility that demand changes before the asset is ready. Check whether raw materials, labor or distribution are the true bottleneck; extra plant capacity may not solve another constraint. Finally, compare expected incremental profit with the new capital required, since producing more units does not by itself establish an attractive return.
Worked example: A plant can produce 1 million units annually and currently runs at 90% utilization, or 900,000 units. Forecast demand is 1.2 million units. Even if the plant reaches 100% utilization, it lacks capacity for 200,000 units. Without outsourcing or productivity gains, expansion must add at least 200,000 units of annual capacity, and the model must allow time and spending for that expansion.
Watch the distinction: Projecting 1.2 million in-house units from a 1 million-unit plant assumes capacity the company does not have. A sales forecast cannot remove a physical bottleneck.
Reference: [2]
19. Evaluate customer concentration and acquisition cost
Customer concentration and customer acquisition economics answer related but distinct questions. Concentration asks how much revenue or profit depends on a small number of buyers and whether contracts, switching costs or replacement demand protect it. Acquisition economics asks whether each new customer generates enough contribution over a realistic life to recover the spending required to win that customer. For subscribers, calculate monthly contribution after variable service costs, then multiply by expected retained months; compare that undiscounted amount with acquisition cost before considering overhead and the time value of money. Examine churn by cohort rather than relying on an average lifetime. A company can have profitable new subscribers yet remain exposed to losing one large enterprise customer. Evaluate both risks in forecasts and valuation rather than letting one favorable metric cancel the other.
Worked example: A firm earns 30% of $100 million revenue from one customer, so $30 million is concentrated. Separately, acquiring a subscriber costs $120; the subscriber yields $10 monthly contribution for an assumed 18 months. Undiscounted lifetime contribution is $10 × 18 = $180, leaving $60 after acquisition cost, before overhead and discounting. Those positive unit economics do not protect the separate $30 million customer relationship.
Watch the distinction: A $60 subscriber surplus does not measure exposure to the major customer. Nor does the 18-month estimate guarantee payback if subscribers leave earlier or service costs rise.
Reference: [2]
20. Diagnose working-capital turnover
Working-capital turnover shows how long cash is tied up between paying for production and collecting from customers. Receivable days equal average receivables divided by annual sales times days in the year. Inventory days equal average inventory divided by annual cost of goods times days; payable days use average payables and the same cost denominator as an approximation. Add receivable and inventory days, then subtract payable days to estimate the cash-conversion cycle. Use consistent periods and preferably average balance-sheet amounts, because year-end balances can be seasonal. Rising receivable days may signal collection trouble or new customer terms; rising inventory days can indicate stock buildup; longer payable days may conserve cash but strain suppliers. Compare each component with peers and the company's own history before assigning a cause.
Worked example: Assume a 365-day year, $365 million sales, $219 million cost of goods, and representative balances of $40 million receivables, $30 million inventory and $24 million payables. Receivable days are $40 million ÷ $365 million × 365 = 40. Inventory days are $30 million ÷ $219 million × 365 = 50; payable days are 40. The cash-conversion cycle is 40 + 50 − 40 = 50 days.
Watch the distinction: Using sales as the denominator for inventory or payables would distort the cycle because those balances relate to cost. One year's result also needs seasonal and historical context.
Reference: [2]
21. Compare accounting choices and obligations
Inventory costing changes which purchase costs enter cost of goods sold and which remain in ending inventory. When purchase prices rise, FIFO generally assigns older, cheaper costs to sales, producing lower cost of goods sold and higher reported profit than LIFO for the same units. Check whether peers use different methods before comparing margins. Also separate accounting expense from cash obligations. A lease creates future payment commitments and recognized assets and liabilities, while depreciation and interest affect reported earnings differently from a simple rent payment. Pension expense depends on actuarial assumptions; promised benefits and plan assets determine funding exposure. Deferred tax assets and liabilities reflect timing differences between book and tax accounting, so current tax expense can differ from cash taxes paid. Reconcile each item separately to understand earnings quality and claims on future cash.
Worked example: Suppose rising purchase costs give a manufacturer $8 million of cost of goods sold under FIFO and $10 million under LIFO for the same sales. Holding everything else constant, LIFO reduces pretax income by $2 million. That comparison says nothing by itself about lease payments, pension funding needs or when deferred taxes reverse; examine those obligations separately before comparing economic value.
Watch the distinction: It is tempting to add back every noncash accounting charge as though it has no economic cost. A pension expense, for instance, may signal future cash contributions.
Reference: [2]
22. Read the debt maturity schedule
A debt total describes obligations outstanding, but a maturity schedule shows when cash or refinancing must be found. Start with gross debt by due date, then compare near-term maturities with cash, expected operating cash flow and committed financing. Calculate net debt as debt less available cash, while remembering that restricted or foreign-held cash may not be readily usable. Separate fixed-rate from floating-rate borrowing: floating interest can reprice quickly, whereas maturing fixed-rate debt may become more expensive only when refinanced. Review covenant definitions and headroom because a breach can accelerate financing pressure even before scheduled maturity. Match debt service to realistic cash generation under a downside case, including capital spending and working-capital demands. An apparently modest leverage ratio may coexist with a large maturity wall and limited access to new capital.
Worked example: Assume $600 million of debt, $400 million due next year and $100 million of unrestricted cash. Net debt is $600 million minus $100 million, or $500 million. Cash covers $100 million ÷ $400 million = 25% of the imminent maturity, leaving $300 million to fund or refinance. Its rate, covenants and prospective cash generation matter more to that near-term risk than net debt alone.
Watch the distinction: A low net-debt ratio does not prove that the company can pay next year's bonds. The due date, available cash and refinancing terms must be assessed together.
Reference: [2]
23. Adjust for corporate transactions
Corporate transactions can make a reported period unrepresentative of the business an investor will own. For a divestiture, remove the sold operation's revenue, costs and EBITDA from a continuing baseline, then consider the sale proceeds, taxes and any stranded corporate costs separately. For an acquisition, distinguish historical results from a full-period contribution and include the financing used to buy it. Restructuring charges may be temporary, yet projected savings require specific actions, costs and timing before they enter a forecast. Likewise, management's synergy estimate is an assumption, not earned profit. Compare pro forma figures with filed results and reconcile the adjustments. Ask whether purchasing power, customer relationships or shared overhead change after the transaction. This sequence prevents a seemingly cheap valuation multiple from mixing a future enterprise value with earnings from assets already sold.
Worked example: Suppose reported EBITDA is $90 million, including $15 million from a division sold at year-end. Continuing historical EBITDA begins at $90 million minus $15 million = $75 million. Management projects $5 million of annual restructuring savings. Show a separate $80 million prospective case only if the savings become effective for the modeled period; $80 million is not the continuing historical result.
Watch the distinction: Subtracting a sold division's EBITDA and immediately adding hoped-for savings treats different kinds of evidence as equal. Keep historical operations and forecast transaction benefits distinct.
Reference: [2]
24. Challenge adjusted results and governance
An adjusted measure can help isolate operating performance, but it must be reconciled to the reported GAAP figure. List each exclusion, its amount, its cash effect and whether similar costs appeared before. A charge described as unusual may be economically recurring if the company restructures every year. Test valuation and coverage ratios using both reported and adjusted figures, particularly when the difference changes an investment conclusion. Accounting choices also affect comparability: look for changes in revenue recognition, reserves or capitalization policies and read the accompanying disclosures. Governance evidence helps judge the reliability of management's presentation. Relevant signals include board oversight, audit findings, executive incentives and related-party transactions disclosed in filings. A well-governed company can still make aggressive adjustments, so the analyst's decision rests on a transparent bridge from reported earnings to a defensible recurring earnings estimate.
Worked example: A company reports $70 million GAAP operating profit and excludes $20 million of restructuring charges to present $90 million adjusted profit. The bridge is $70 million + $20 million = $90 million. If similar charges occurred in each of three years, model $70 million as a plausible recurring-profit case and compare valuation under both figures. Examine disclosures and oversight before accepting the $90 million case.
Watch the distinction: Calling an expense nonrecurring because management excludes it can overstate sustainable profit. Repeated restructuring charges may be part of the cost of operating the business.
Reference: [2]
Series 86 / Part 1 - Function 3: Valuation and Forecasting
25. Build an earnings bridge
An earnings forecast should follow the income statement in order so that every assumption has a visible effect. Forecast sales from units, price or another operating driver, then subtract cost of goods sold and operating expenses to reach operating profit. Subtract interest and other nonoperating items to estimate pretax income; apply a stated tax assumption to reach net income. Divide by forecast diluted shares for earnings per share. Check whether new borrowing changes interest, whether buybacks or equity issuance change diluted shares, and whether tax losses or one-time benefits make the assumed rate unreliable. A model that holds share count or interest constant despite a financing transaction breaks the bridge. Use sensitivities to locate the strongest driver: a modest margin change can matter more to EPS than a larger sales change when fixed costs are high.
Worked example: Assume $120 million forecast operating profit, $20 million interest expense, no other nonoperating items and a 25% tax rate. Pretax income is $100 million. Taxes are $25 million, leaving $75 million net income. With 50 million diluted shares, EPS is $75 million ÷ 50 million = $1.50 per share. A changed interest bill or share count would change that forecast.
Watch the distinction: Dividing operating profit by shares overstates EPS when interest and taxes remain. Carry the forecast through pretax income, taxes and diluted share count first.
Reference: [2]
26. Forecast sales and operating profit
Revenue is a product of quantity and realized price, not merely a growth percentage. Forecast units from demand, market share and capacity; forecast realized price after discounts and product mix. Then derive gross profit from revenue less production or service costs. A gross-margin assumption should reflect input prices, utilization and pricing power, while operating expenses should distinguish fixed from variable spending. Check that the same volume assumption flows through inventory, working capital and capital needs. Comparing the forecast with historical margins and peers can expose a case that requires more favorable economics than the company has demonstrated. Test a one-point margin change in dollars by multiplying one percentage point by forecast sales. That sensitivity shows whether the conclusion depends on a narrow margin improvement or a substantial change in demand.
Worked example: Assume 2 million units sold at $50 each, producing $100 million revenue. A 40% gross margin gives $40 million gross profit. After $25 million operating expenses, operating profit is $15 million. If gross margin is 39% with sales and expenses unchanged, gross profit is $39 million and operating profit is $14 million. One percentage point costs $1 million.
Watch the distinction: A 40% gross margin is not a 40% operating margin. Operating expenses still have to be deducted, and their behavior may differ from production costs.
Reference: [2]
27. Forecast sources and uses of cash
A cash forecast follows the movement of funds, which differs from reported profit. Begin with projected earnings, add back noncash charges such as depreciation, and account for increases or decreases in receivables, inventory and payables to estimate operating cash flow. Subtract capital spending to obtain a common free-cash-flow measure. Then show financing uses or sources, such as debt repayment, new borrowing, dividends or share issuance, to reconcile the change in cash. A repayment reduces cash and debt on the balance sheet, but it does not change operating cash flow or the usual operating-cash-flow-minus-capital-spending definition of free cash flow. Verify that ending cash in the forecast balance sheet equals beginning cash plus the net change. A business can report rising earnings while consuming cash if customers pay more slowly or inventory builds.
Worked example: Suppose forecast operating cash flow is $80 million, capital spending is $50 million and debt repayment is $20 million, with no other cash flows. Free cash flow is $80 million minus $50 million = $30 million. After repaying debt, cash increases by $10 million. The repayment is a financing use of cash; it does not reduce the $30 million free-cash-flow figure.
Watch the distinction: Subtracting debt repayment when computing operating free cash flow mixes investment and financing decisions. Include repayment in the full cash reconciliation, then check the ending balance.
Reference: [2]
28. Forecast the balance sheet
A balance-sheet forecast tests whether an operating forecast can be funded. Link receivables to sales and collection days, inventory to cost of goods sold and holding days, and payables to purchases or an appropriate cost base and payment days. If sales grow faster than assets, explain the productivity improvement rather than leaving assets flat by default. Forecast capital spending, depreciation and disposals to roll forward property and equipment. Then update debt, cash and equity for financing flows, earnings and distributions. The balance sheet must balance after these movements. An increase in receivables uses cash even when revenue and profit rise, because customers have not yet paid. A funding shortfall may require borrowing, equity issuance, lower spending or a revised operating plan, each with consequences for earnings per share and valuation.
Worked example: Assume annual credit sales of $365 million, a 365-day year and unchanged sales. At 30 receivable days, average receivables are $365 million ÷ 365 × 30 = $30 million. At 45 days they are $45 million. The $15 million increase consumes cash unless another balance-sheet item supplies it. Check that the cash and financing forecasts reflect the change.
Watch the distinction: Higher forecast revenue does not automatically produce more cash. If collection takes longer, receivables may absorb cash even while the income statement shows stronger sales.
Reference: [2]
29. Support assumptions with drivers
A forecast assumption is useful only when it can be connected to an observable driver. Decompose sales into market size, share and price, then compare each component with history, peers and physical capacity. A projection above market growth requires share gains, price increases, acquisitions or a favorable product mix; identify which one supplies the difference. For margins, test whether contracts, input costs and utilization support the change. Build a base case from supported drivers and a competing case that quantifies the disputed assumption. Also check dependencies: a share gain may need sales spending or new capacity, which changes profit and cash flow. The aim is a causal model in which a new fact can revise a specific input. A round growth rate without an operating explanation is difficult to defend or update.
Worked example: Suppose current revenue is $100 million, the market grows 5%, prices are unchanged and the company's share stays constant. The supported revenue forecast is $100 million × 1.05 = $105 million. A model showing 20% growth projects $120 million, leaving a $15 million gap. The analyst must specify the share gain, price change, mix shift or acquisition that fills it and its associated costs.
Watch the distinction: Historical company growth alone cannot justify a new 20% forecast when market growth is 5%. Identify the source of outperformance and the resources required to achieve it.
Reference: [2]
30. Update a model when evidence changes
When new evidence arrives, revise the affected driver first and follow its effects through the statements. A lower revenue guide may change contribution profit, taxes, working capital and valuation, but each effect depends on its own assumption. Preserve the old and new cases so the change in forecast is explainable. Check whether the news is a timing shift, a permanent change in demand or a change in price or mix; each has different implications for later years. A one-year delay can affect discounted value even if lifetime sales are unchanged. Recalculate earnings per share using the updated tax and diluted-share assumptions, and recalculate cash flow if receivables or inventory also change. Compare the resulting value with the previous recommendation rather than automatically changing the rating when a single estimate moves.
Worked example: A company lowers expected annual revenue by $10 million. At an assumed 30% contribution margin, operating profit falls $3 million. With unchanged interest, a 25% tax rate and 20 million diluted shares, net income falls $3 million × 75% = $2.25 million. EPS falls $0.1125, moving a $2.00 forecast to $1.8875, or about $1.89. Cash effects require separate working-capital assumptions.
Watch the distinction: Reducing revenue by $10 million does not imply a $10 million profit decline. Apply the relevant contribution margin, then trace taxes, shares and cash consequences.
Reference: [2]
31. Choose an equity multiple
An equity multiple should match the economic feature being valued. Price-to-earnings compares share price with earnings attributable to common shareholders, but a cyclical peak can make a stock look deceptively cheap; normalized or midcycle earnings may be more useful. Price-to-book compares market value with accounting net assets, which can matter for asset-based businesses, although book values may differ from realizable value. Tangible book removes goodwill and other intangible assets, changing the denominator and often raising the multiple. PEG relates P/E to an expected earnings growth rate, usually entered as a whole-number percentage, but it inherits uncertainty in both earnings and growth. Compare businesses with similar accounting, capital intensity, risk and growth prospects. No multiple supplies a valuation conclusion by itself; the analyst must explain why the selected denominator represents sustainable value.
Worked example: At $60 per share, with $4 forecast EPS and $30 book value per share, P/E is $60 ÷ $4 = 15 and P/B is $60 ÷ $30 = 2. If expected EPS growth is 10%, PEG is 15 ÷ 10 = 1.5 under the whole-percent convention. A cyclical earnings peak could make the 15 P/E misleadingly low; test normalized earnings.
Watch the distinction: A low P/E is not necessarily a bargain when current earnings are unusually high. Normalize cyclical profit and examine balance-sheet quality before comparing peers.
Reference: [2]
32. Discount cash flows and dividends
Discounted valuation matches a future cash-flow claim with the return required by the investor who owns that claim. A dividend discount model values shareholder dividends using a cost of equity. A company-wide discounted cash flow model commonly discounts free cash flow to the firm at a weighted cost of capital, then adjusts enterprise value for debt, cash and other claims to reach equity value. Discounting equity cash flow at a company-wide rate mixes claims and can misstate value. The constant-growth dividend formula, next year's dividend divided by required equity return minus perpetual growth, applies only when growth is below the required return and a stable long-run payout is plausible. Examine near-term dividends, reinvestment needs and whether long-run growth is economically sustainable. Small changes in the discount-rate-minus-growth gap can produce large changes in value.
Worked example: Assume a $2 dividend next year, an 8% required equity return and 3% perpetual dividend growth. The constant-growth value is $2 ÷ (0.08 − 0.03) = $40 per share. If the required return rises to 9% with other inputs unchanged, value becomes $2 ÷ 0.06 = about $33.33. The $6.67 difference shows sensitivity to the assumed spread.
Watch the distinction: Using the weighted cost of capital to discount dividends confuses company-wide and shareholder cash flows. Dividends belong to equity holders and require an equity discount rate.
Reference: [2]
33. Use enterprise-value multiples
Enterprise value represents the value of operating assets available to all financing claimants. A basic bridge adds debt to equity market value and subtracts excess cash; additional claims such as preferred stock or noncontrolling interests may require adjustment. Match that company-wide numerator with operating measures before interest, such as EBITDA or sales. EBITDA omits capital spending, working-capital needs and taxes, so two companies at the same EV/EBITDA may generate very different cash. EV/sales can compare firms with uneven current margins, but its meaning depends heavily on achievable margins and capital intensity. Use consistent treatment of leases, acquisitions and minority interests across peers. When turning an enterprise-value estimate into a share price, subtract financing claims, add appropriate cash, and divide by diluted shares. A multiple comparison is a starting point for investigating economic differences.
Worked example: Suppose equity market value is $900 million, debt is $300 million and excess cash is $100 million, with no other claims. Enterprise value is $900 million + $300 million − $100 million = $1.1 billion. With $100 million EBITDA, EV/EBITDA is 11 times; with $500 million sales, EV/sales is 2.2 times. Compare margins and capital needs before interpreting either multiple.
Watch the distinction: Dividing equity market value by EBITDA mismatches a shareholder claim with a company-wide earnings measure. Use enterprise value with EBITDA and equity value with equity earnings.
Reference: [2]
34. Test leverage and debt coverage
Leverage measures the size of a financing burden; coverage measures the capacity to carry it. Debt divided by EBITDA is a rough load measure, but EBITDA does not pay interest by itself when working capital and capital spending consume cash. Operating-profit interest coverage divides operating profit by interest expense and shows how much earnings could decline before that particular coverage measure reaches one. Examine the quality and stability of earnings, fixed versus floating rates, debt maturities and covenant definitions. A high coverage ratio today may deteriorate if demand weakens or borrowing costs reset. Conversely, a low ratio in a temporary investment year requires a credible path to recovery, not just a favorable forecast. Stress both the earnings numerator and the interest denominator, then reconcile the result with projected cash available for debt service.
Worked example: Assume $500 million debt, $100 million EBITDA, $60 million operating profit and $20 million annual interest. Debt/EBITDA is 5 times and operating-profit interest coverage is $60 million ÷ $20 million = 3 times. If operating profit falls to $30 million while interest stays at $20 million, coverage drops to 1.5 times. Debt/EBITDA alone would miss that earnings deterioration.
Watch the distinction: Debt/EBITDA and interest coverage answer different questions. A fixed debt balance does not mean fixed debt-service capacity when operating profit or interest rates change.
Reference: [2]
35. Relate capital costs to economic profit
The weighted average cost of capital combines the returns required by providers of debt and equity, using financing weights consistent with the valuation. Use an after-tax debt cost when interest deductibility is assumed and a required equity return for shareholders. Compare the resulting capital charge with after-tax operating profit, or NOPAT, rather than net income after interest. Return on invested capital equals NOPAT divided by the operating capital employed; economic profit equals NOPAT minus invested capital multiplied by WACC. Positive accounting earnings can still destroy value if the return earned on new capital falls below its cost. Check whether the capital base excludes excess cash and includes relevant operating obligations, and whether financing weights reflect a sustainable structure. Growth adds value only when incremental investments earn more than their required return.
Worked example: Assume 60% equity at a 10% required return and 40% debt at a 6% after-tax cost. WACC is 0.60 × 10% + 0.40 × 6% = 8.4%. With $500 million invested capital and $50 million NOPAT, return on invested capital is 10%. The capital charge is $42 million, so economic profit is $50 million − $42 million = $8 million.
Watch the distinction: Revenue growth is not automatically value creation. If additional invested capital earns less than its cost, growth can raise accounting profit while reducing economic value.
Reference: [2]
36. Value segments and test catalysts
A sum-of-the-parts valuation estimates each business segment using economics appropriate to that segment, then combines the values. Start with operating values, account for shared corporate costs and assets, and subtract debt and other claims while adding appropriate cash to reach equity value. Avoid counting the same cash flow or asset twice, especially when a segment multiple already includes shared operations. Divide by diluted shares for an implied per-share value. Compare the result with market price to identify a potential gap, then ask what could cause investors to recognize it. A divestiture, spin-off, operational change or clearer reporting may serve as a catalyst, but transaction taxes, separation costs, timing and buyer price can reduce realized proceeds. An estimated gap is a valuation judgment; a catalyst is a plausible event with an uncertain probability and payoff.
Worked example: Suppose two operating segments are valued at $700 million and $500 million. Combined enterprise value is $1.2 billion. With $300 million debt, $100 million excess cash and no other claims, equity value is $1.2 billion − $300 million + $100 million = $1 billion. Across 50 million diluted shares, that is $20 per share. A planned sale may reveal value, subject to proceeds and costs.
Watch the distinction: Adding segment values and dividing by shares overstates equity value when debt remains. Account for financing claims, shared costs and transaction leakage before comparing with the stock price.
Reference: [2]
Series 87 / Part 2 - Function 4: Preparation of Research Reports
37. Explain a rating system
A rating communicates a firm's defined judgment, which may concern absolute return, performance relative to a benchmark or another stated framework. Read the rating definition, benchmark and time horizon before translating the label into an investment view. A target price is a model estimate, while a rating may incorporate risk, expected dividends and relative performance, so the two need not move together. Research reports should explain the firm's ratings system so readers can interpret each category consistently. The analyst should test whether the recommendation follows the stated definition and whether the investment thesis supports it. When discussing a report, preserve the original meaning rather than replacing a relative rating with a casual word such as buy. For the Series 87 study guide, connect report language with its accompanying valuation and risk explanation.
Worked example: Assume a firm's positive rating means expected outperformance of its sector over 12 months. An analyst forecasts an 8% stock return and a 12% sector return over that period. Relative performance is 8% − 12% = negative 4 percentage points. The stock may rise in absolute terms, but the forecast does not meet that firm's positive-rating definition unless another stated factor changes the comparison.
Watch the distinction: A positive expected stock return does not automatically justify a positive relative rating. Apply the firm's stated benchmark and time horizon before interpreting the label.
Reference: [2]
38. Interpret ratings distribution
A ratings distribution tells readers how often a firm assigns each rating across its covered companies. Calculate the count in each category divided by the total covered universe, using the firm's defined categories. The disclosure provides context: a label used for most companies may have a different practical selectivity from one used sparingly. It does not, however, prove that any individual rating is wrong or that a particular company lacks upside. Read it alongside the rating definition, investment thesis and disclosed conflicts. FINRA's Series 86/87 content outline identifies ratings systems and ratings distribution as research-report disclosure topics. In analysis, be alert to denominator changes when coverage expands or contracts; comparing two distributions is less informative unless the covered populations and category definitions are reasonably consistent.
Worked example: A hypothetical firm covers 100 companies: 60 positive, 30 neutral and 10 negative. The distribution is 60%, 30% and 10%, respectively, because each count is divided by 100. A positive label is common in this coverage universe. That fact gives context, but the stock's rating still requires its own definition, valuation support and risk analysis.
Watch the distinction: A 60% positive distribution does not mean each positive-rated stock has a 60% chance of rising. Distribution counts recommendations; it is not a probability forecast.
Reference: [2]
39. Read a historical price chart disclosure
A historical price chart lets a reader place research actions against what investors could have observed at the time. Marked rating and target changes show whether an analyst raised or cut an estimate before or after a major price move. Calculate indicated upside using the target and market price from the same date: target divided by contemporaneous price, minus one. Compare successive decisions using their dates and the reasons recorded in the report, not by pairing a new target with an old stock price. Consider dividends, corporate actions and the chart's adjustment basis when interpreting long histories. A price chart can reveal responsiveness or repeated forecast error, but it cannot establish motive or guarantee future accuracy. The analyst's task is to explain how changed fundamentals or valuation assumptions led to each revision.
Worked example: A $50 target set when a stock trades at $40 implies $50 ÷ $40 − 1 = 25% upside. Later, the stock falls to $35 and the target is cut to $45. The revised indicated upside is $45 ÷ $35 − 1 = about 28.6%. The higher percentage reflects a lower starting price despite the lower target; report both dates clearly.
Watch the distinction: Comparing the new $45 target with the old $40 price gives an irrelevant 12.5% figure. Target upside must use the stock price prevailing at that target's date.
Reference: [2]
40. Identify investment banking conflicts
An investment banking relationship can create an incentive, or the appearance of one, for favorable research about a covered issuer. Identify the relevant relationship, assess whether it is a material conflict and include the applicable disclosure with the research communication. Independence also requires separation of research judgment from banking pressure: valuation assumptions and recommendations should follow evidence rather than transaction goals. A disclosed conflict does not by itself invalidate a report; readers still need to test the model, thesis and risks. Conversely, a persuasive model does not erase the need to disclose a relevant relationship. Distinguish the firm's relationship from the analyst's personal financial interests and from the firm's securities positions, since each raises a different disclosure question. Before distribution or a public appearance, verify that conflict information is current and that the communication gives readers enough context to evaluate the recommendation.
Worked example: Suppose an analyst recommends Issuer A while the analyst's firm has an investment banking relationship with A. The analyst checks the valuation assumptions against public financial data and explains the main downside case, while the report carries the applicable banking-conflict disclosure. The recommendation may remain analytically supportable, but omitting the relationship would deprive readers of material context for judging independence.
Watch the distinction: Sound arithmetic does not cancel a banking conflict. A reader needs both the analysis and relevant disclosure to judge how much confidence to place in the recommendation.
Reference: [2]
41. Identify analyst financial interests
A research analyst’s financial interest can give readers reason to question whether the analyst’s judgment is independent. Examine interests in the subject company’s equity securities held by the analyst and household members, including holdings through an account managed by someone else. Account management may limit the analyst’s control over trades, but it does not erase the economic exposure. Identify who owns the interest, what security is held, whether the analyst can influence transactions, and what the applicable disclosure and trading controls require. Keep this inquiry separate from the firm’s holdings: an analyst’s personal disclosure does not describe the broker-dealer’s position. When reviewing a draft report, check that the interest assessment reflects current holdings and that any required disclosure travels with the recommendation. The FINRA content outline identifies analyst and household interests as a research-report disclosure topic.
Worked example: An analyst covers Company A. A household member owns 200 A shares in a managed account and cannot direct individual trades. The household still has a financial interest in A. The analyst identifies the holding for assessment under applicable disclosure and trading rules, while separately checking whether the firm owns A shares. The managed-account arrangement is relevant to control over trading, but it does not make the holding disappear.
Watch the distinction: A common error is to ignore household shares because a portfolio manager bought them. Delegated trading authority changes who chose the trade; it does not eliminate the household’s economic interest.
Reference: [2]
42. Identify firm ownership and market making
A broker-dealer may have an interest in a covered issuer apart from anything the analyst owns. A firm securities position exposes the firm to price changes; making a market means it stands ready to quote prices and trade with customers in the security. These facts have different economic meanings and should be assessed separately for disclosure. Neither fact proves that the analyst’s conclusion is wrong, but each helps readers evaluate potential conflicts. Start by identifying the subject company and security, then obtain the firm’s relevant ownership and market-making information through the report process. Compare the resulting disclosures with the report’s date and scope. An analyst’s statement that they personally hold no shares answers only the personal-interest question. It cannot substitute for information about the firm, its trading role, or other material relationships.
Worked example: A firm holds Company B shares in an inventory account and also makes a market in B. Its analyst recommends B. The report process must assess the inventory interest and the market-making role as distinct facts. A sentence saying that the analyst owns no B shares describes the analyst alone. Readers still need the applicable firm disclosures to understand the broker-dealer’s interests.
Watch the distinction: Do not treat market making and firm ownership as one disclosure. The first describes a trading role; the second describes an economic position, and both differ from the analyst’s holdings.
Reference: [2]
43. Complete approval and analyst certification
A report needs both the required review before dissemination and the analyst’s own certification where Regulation AC applies. Supervisory approval addresses whether the communication has passed the firm’s review process, including its factual support, presentation, and required disclosures. The certification addresses a different question: whether the expressed views accurately reflect the analyst’s personal views and whether compensation was, is, or will be related to the specific recommendations or views, with the required explanation if a relationship exists. One signature cannot silently perform both functions. Work through a release checklist in order: settle the analytical content, verify disclosures, obtain the applicable approval, confirm certification, then release through controlled channels. The supervisor’s role also has a qualification dimension described on FINRA’s Research Analyst Exams page; the related Series 24 guide covers principal-level study separately.
Worked example: An analyst’s draft contains verified figures and a supported recommendation, but supervisory approval and the analyst certification are missing. Fact checking alone does not make it ready to publish. The firm first completes the required review and approval. The analyst then supplies the applicable certification concerning personal views and compensation. Only after these steps and the other release checks should the report be disseminated.
Watch the distinction: It is tempting to assume that a supervisor’s approval certifies the analyst’s personal views. Approval and Regulation AC certification address different responsibilities, so neither replaces the other.
44. Apply report and appearance restrictions
Restrictions on research activity can attach to the content, the issuer, the transaction, and the timing of a communication. They may affect a written report and a public appearance, such as a conference talk or media interview. Before releasing a view, identify the covered issuer, the proposed message, the analyst’s role, and any transaction-related or other applicable restriction. Then determine whether the specific form of communication is permitted and what disclosures or approvals it needs. Changing the delivery channel does not change the substance of a recommendation. A verbal statement may reach investors just as effectively as a report. Avoid assuming that every restriction has the same duration or scope; the decision depends on the governing rule and the facts. Where an appearance is allowed, its spoken claims still need support and appropriate conflict context.
Worked example: An analyst cannot publish a report on Company C during a specified transaction period. A conference organizer then asks the analyst to discuss C’s prospects onstage. Repeating the proposed recommendation orally would still be a public research-related communication. The analyst assesses the appearance against the applicable restriction before speaking; choosing a microphone instead of a report does not establish permission.
Watch the distinction: A publication restriction is not solved by moving the same opinion to a panel or interview. Public appearances have their own restrictions and disclosure considerations.
Reference: [2]
45. Control communications, trading and records
Research integrity depends on who learns a pending view, when they learn it, and whether trading can occur before broad release. Compensation arrangements can also create pressure on an analyst’s conclusions, so the analyst should distinguish supported judgment from business incentives. When a rating or target changes, trace the sequence: final decision, approvals, permitted internal handling, controlled dissemination, and later discussion. A private message about an unpublished change can give its recipient a trading advantage even if the analysis is sound. Trading restrictions and communications controls address that timing risk; retained messages allow the firm to reconstruct what happened. Examine the substance of a communication rather than its label. A brief chat that reveals a forthcoming downgrade matters more than a long administrative email that contains no unpublished view. Records should preserve the relevant message and its timing.
Worked example: At 10 a.m., an analyst finalizes a downgrade planned for release at 4 p.m. At noon, the analyst messages a trading colleague that the rating will fall. The six-hour lead could enable trading ahead of the report. The firm should preserve the message, establish who received it and whether anyone traded, and address the breach under its research and trading controls.
Watch the distinction: An accurate eventual report does not cure an early selective tip. The concern arises from unequal access to the pending research decision and the opportunity to trade on it.
Reference: [2]
46. Choose the right coverage report
The report type should match the decision being communicated. An initiation introduces coverage and establishes the analyst’s initial view. A rating change explains why the recommendation category changed. A price-target revision explains a changed valuation estimate even if the rating stays constant. A projected-earnings change explains revised operating assumptions and their effect on estimates. Termination of coverage tells readers that ongoing research coverage has ended, rather than leaving an old recommendation appearing active. Start with what changed, identify the evidence that caused it, and show how it flows through forecasts, valuation, and risk. Keep the rating, target, and earnings estimate distinct: each can move without the others. This distinction helps readers interpret a report quickly and prevents a target adjustment from being described as a new recommendation. Candidates studying this part can compare these formats in the Series 87 guide.
Worked example: An analyst keeps a positive rating but reduces a target from $60 to $48 after cutting forecast cash flows. The target falls $12, or 20% of the old target. The communication is a target revision and should connect lower cash-flow estimates to the new valuation. If the analyst later stops following the issuer, that separate communication should clearly state that coverage has ended.
Watch the distinction: A lower target is not automatically a downgrade. A rating expresses a defined recommendation, while a target states an estimated price; check which one actually changed.
Reference: [2]
47. Analyze earnings releases
An earnings preview states expectations before a company reports; an earnings review interprets results after release. In a review, compare reported figures with the analyst’s forecast and prior period, then isolate the drivers of any difference. Separate volume, price, mix, costs, taxes, and unusual items where the evidence allows. A headline earnings-per-share beat may come from a lower tax charge rather than stronger sales or margins. Reconcile the per-share effect before changing an operating forecast. Next ask whether the driver is likely to recur and whether it changes cash generation or valuation. The review should explain both the numerical surprise and its quality, while the preview should specify the assumptions and uncertainties behind the expected result. An industry report may place the same company result in a broader sector pattern, but it still needs to preserve the distinction between reported and underlying performance.
Worked example: A company reports EPS of $1.20 against an analyst forecast of $1.00, apparently beating it by $0.20. A one-time tax benefit contributed $0.25 per share. Excluding that benefit gives $1.20 minus $0.25, or $0.95 per share, which is $0.05 below forecast. The review should describe a headline beat but an underlying miss on this simplified measure.
Watch the distinction: Do not raise an operating forecast merely because reported EPS beat the estimate. First identify whether the difference came from operations, financing, taxes, or a nonrecurring item.
Reference: [2]
48. Build a supported investment thesis
A useful investment thesis lets a reader follow the chain from business evidence to expected return. State the company’s competitive position and the operating change you expect, translate that change into revenue, margins, cash flow, or earnings, and show how the valuation method produces a target. Then identify the catalyst that could make investors recognize the value and the risks that could break the chain. Separate evidence from assumptions: historical margins may support a recovery case, but they do not guarantee it. A sensitivity or downside case tests the most important assumption. The report should also explain the rating’s time horizon and meaning so the target is not read as a promise. If a small change in one input moves the value substantially, make that dependence visible. A reader should be able to disagree with an assumption and see what happens to the conclusion.
Worked example: A stock trades at $40. A model gives $50 per share if operating margin rises from 12% to 18%, implying ($50 minus $40) divided by $40, or 25% upside. Suppose the same model gives $38 if margin stays at 12%; that is 5% below today’s price. The thesis needs evidence for the six-point margin gain and must show this downside dependence.
Watch the distinction: A target price alone is not an investment thesis. Without the operating assumptions, valuation method, time horizon, and principal risks, readers cannot test the recommendation.
Reference: [2]
Series 87 / Part 2 - Function 5: Dissemination and Marketing of Information
49. Discuss research with institutional clients
Institutional clients may ask how published research affects a particular portfolio, hedge, or risk exposure. Answer the question by identifying which assumptions in the published model matter and showing a conditional sensitivity. Keep the distinction between an official target and an alternative scenario clear. For example, currency exposure can change translated revenue, costs, and valuation; a single exchange-rate adjustment may affect each differently. State what remains fixed in the sensitivity so the client can interpret it. A conversation should preserve the rating’s definition and the report’s central thesis, even when the client asks for a narrower portfolio application. If new information changes the analyst’s actual view, use the appropriate research update and dissemination process. Selective discussion of an unpublished recommendation can distort both market access and the meaning of the published report.
Worked example: A portfolio manager asks whether a $50 target assumes stable currency rates. The analyst says yes and explains that, with other model inputs held constant, a hypothetical 5% currency decline lowers modeled value to $46. That is $4, or 8%, below the published target. The $46 figure is a conditional sensitivity, while $50 remains the stated target unless formally revised.
Watch the distinction: Do not present a client-specific sensitivity as a new public target. Label the changed input and explain which published assumption the calculation is testing.
Reference: [2]
50. Explain research to retail clients
Retail communication should let a reader understand the recommendation without decoding research shorthand. State the firm’s rating meaning, the expected time horizon, the current price used for comparison, and how the analyst reached the target. Explain the main operating assumption in plain terms, then describe a credible downside case. A price target expresses a modeled outcome, not a guaranteed return; the current market price can also change after the report is written. Use the same date and price basis when comparing upside and downside. If a dividend matters, distinguish price change from total return. Avoid compressing a mixed view into a confident slogan: a stock may show upside in the central case while carrying substantial loss in a weak-demand case. Readers should be able to see what must go right and what could go wrong.
Worked example: A report uses a $40 current price and a $48 target. Indicated price upside is ($48 minus $40) divided by $40, or 20%. A weak-demand case values the stock at $32, giving ($32 minus $40) divided by $40, or a 20% loss. Explain the assumptions and time horizon behind both figures; neither outcome is guaranteed.
Watch the distinction: It is misleading to quote the 20% upside without the basis and principal downside risk. A target is a conditional valuation estimate, not a promised return.
Reference: [2]
51. Brief institutional sales
Institutional sales staff relay research to portfolio managers who may challenge its assumptions. A useful briefing gives them the published rating and target, the evidence behind the thesis, the event or operating driver to watch, and the main condition under which the view fails. Keep the same time horizon and definitions used in the report. Distinguish what the analyst has concluded from an illustrative sensitivity, and identify where the report contains the fuller analysis and disclosures. A sales summary can become misleading through omission even when every quoted number is correct. Ask what a listener would infer from the short version: if they would hear an unconditional target while the model requires a cost decline, the summary needs the condition. Questions that expose a material change in the thesis should lead to an analyst review before sales staff relay a revised view.
Worked example: A report gives a $55 target if input costs stabilize and margins recover. An institutional sales draft says only, “Target $55; margins will recover.” Revise it to explain that the target depends on stable input costs and that renewed cost inflation threatens the margin forecast. The target number stays $55, but its condition and principal risk travel with it.
Watch the distinction: A correct target quoted without its controlling assumption can still misstate the research. Briefings must preserve the causal reason for the target and the risk to it.
Reference: [2]
52. Brief retail sales
Retail sales staff need a short explanation that keeps the firm’s rating definition intact. Begin with the exact published rating, then state what it means over the specified horizon. Add the analyst’s valuation estimate and the principal reason the stock could perform better or worse than expected. A target modestly above today’s price does not automatically turn a neutral rating into a buy recommendation: ratings may depend on relative performance, risk, and the firm’s defined categories. The salesperson should avoid inventing a stronger label to make the pitch sound decisive. Check the summary against the approved report, including its date, current price basis, assumptions, and disclosures. If the market price has moved since publication, recalculate indicated price change while making clear that the analyst has not necessarily changed the rating or target.
Worked example: A report rates a stock neutral and gives a $42 target when the stock trades at $40. Indicated upside is ($42 minus $40) divided by $40, or 5%. A salesperson calls that a buy. Correct the explanation to “neutral,” using the firm’s definition and the report’s reasons. The 5% price gap describes one calculation; it does not rename the recommendation.
Watch the distinction: Do not infer a rating solely from target minus price. The firm’s rating definition, horizon, relative benchmark if used, and risk assessment determine the published label.
Reference: [2]
53. Handle trading-desk interactions
A trading desk may discuss already published research with an analyst, but a pending rating or target change raises a different issue. Early disclosure could let a desk trade before clients receive the research. Identify whether the requested information is public, approved for release, and being distributed through the established channel. If it is still unpublished, avoid revealing the direction or timing of the change outside permitted controls. The risk concerns the informational advantage, not merely whether an actual trade later occurs. Document relevant contacts and timing so the firm can assess any trading-ahead question. Once a report has been released appropriately, the analyst can explain its assumptions without giving one desk a different unpublished recommendation. This sequence connects research dissemination to the trading-ahead topic identified in the Series 87 outline.
Worked example: At noon, a trader asks whether an analyst will downgrade Company D after the close. The analyst has decided to do so, but the report has not been released. Answering yes would disclose the pending view hours early. The analyst withholds the unpublished rating and uses the controlled release process before discussing the change with the desk.
Watch the distinction: The desk’s internal status does not make advance disclosure harmless. A trader can act on a pending downgrade before research clients receive it.
Reference: [2]
54. Question company management
Company management is a valuable source for testing operating assumptions, but access does not make every statement usable in research. Ask questions that connect claims to measurable drivers: orders, capacity, pricing, costs, or customer retention. Compare answers with public filings and other evidence, and note where management is expressing a forecast rather than reporting an observed fact. If a private conversation appears to reveal material nonpublic information, stop treating it as ordinary model input and assess its status through the firm’s information controls. Selective disclosure can affect whether the information may be used or passed to clients. Even public management claims need scrutiny; incentives and uncertainty may weaken them. An analyst’s job is to evaluate the evidence independently, not to turn a confident executive statement into an unsupported recommendation.
Worked example: A chief executive privately says next quarter’s revenue will exceed public guidance by 20%. If public guidance were hypothetically $100 million, the comment implies more than $120 million. The analyst should not place $120 million in a client note as if it were public evidence. First assess whether the statement is material and nonpublic, and handle it under the firm’s information controls.
Watch the distinction: Management access is not permission to distribute a private forecast. A precise, market-moving claim needs a public-status and materiality assessment before it informs client communication.
Reference: [2]
55. Speak with press and media
Press and media comments can reach a wider audience than a client call, often in a short quote stripped of surrounding analysis. Prepare a concise statement that matches the published thesis, including its key assumption and principal risk. Distinguish a supported opinion from a certainty claim. If the analyst’s firm or the analyst has a relevant conflict, assess the disclosure needed for the appearance rather than assuming the report’s disclosures will automatically accompany the quote. Avoid discussing an unpublished change selectively with a reporter. When answering a question, use the report’s current rating and valuation basis; if the underlying information has materially changed, update the research before presenting the old thesis as current. A useful test is whether a reader seeing only the quoted sentence would come away with a fair impression of the analyst’s view.
Worked example: A reporter asks why an analyst finds Company E attractive. The published case expects demand growth and values the stock above its current price, but depends on a product launch. The analyst explains both the demand case and launch risk. Calling it a “sure winner” would overstate a conditional forecast. The analyst also handles applicable conflict disclosure for the appearance.
Watch the distinction: A media interview is not an informal exception to research standards. Short public remarks can mislead if they omit a central condition or relevant conflict.
Reference: [2]
56. Coordinate with other research teams
Different research teams can reach different forecasts because they study different customer groups, time periods, or spending definitions. Before forcing agreement, align the units and populations: is each team measuring cloud spending, total technology budgets, or revenue for a particular supplier? Check whether one forecast reflects a broad market and the other a utility customer segment. Reconcile shared inputs, such as currency or macro assumptions, where they should match. Preserve a genuine difference when evidence supports it, and explain that difference in a cross-sector report. When combining forecasts, weight them by the relevant base rather than averaging percentages mechanically. This process improves internal consistency without suppressing independent judgment. It also helps readers distinguish a company’s growth opportunity from the growth rate of the entire market it serves.
Worked example: A technology team projects 15% cloud-spending growth for a $100 million customer base; a utilities team projects 8% for a separate $50 million base. Next-period spending would be $115 million plus $54 million, or $169 million, versus $150 million initially. Combined growth is $19 million divided by $150 million, about 12.7%. Both team forecasts can stand if their customer populations differ.
Watch the distinction: Averaging 15% and 8% to get 11.5% ignores the size of each customer base. First establish that the measures are comparable, then use appropriate weights.
Reference: [2]
57. Use calls and blast voice mail carefully
A one-to-one call can answer a client’s question about published research, while a blast voice mail distributes a prepared message to many recipients. The broader distribution makes wording, timing, and audience especially important. Identify the report being summarized, use its approved rating and target, and carry over any condition that materially changes their meaning. A short recording need not recite every detail, but it should not imply certainty where the analysis depends on an event. Release it through the appropriate research channel so recipients receive the intended message on a controlled basis. Retain the substance and distribution record as required, including what was said and when it was sent. If a caller asks for an unpublished change, treat that as a separate issue rather than quietly adding it to a private conversation.
Worked example: An analyst records, “Our target for Company F is now $70.” The approved report says $70 depends on a pending product approval. Revise the recording to state that condition and the risk of rejection, then distribute it through the controlled process. Otherwise listeners could mistake a conditional valuation for an unconditional forecast, even if the report contains the missing detail.
Watch the distinction: A linked or attached report does not always repair a misleading voice summary. The spoken claim should carry the condition that makes the target intelligible.
Reference: [2]
58. Treat texts and instant messages as research communications
A text or instant message can communicate a recommendation just as effectively as a formal report. Judge it by content, recipient, and timing rather than its length or casual tone. A message that reveals an unpublished downgrade may give one client an opportunity to trade before broader dissemination; a message containing a published view still needs to represent that view accurately. Use approved communication channels so the firm can supervise and retain relevant records. Consider whether the short format strips out a rating definition or material qualification. If the idea requires context that will not fit, point the recipient to the approved report and provide a faithful summary. The Series 86/87 practice questions can help test the distinction between a routine explanation and premature distribution of a changed view.
Worked example: An analyst texts one client, “Downgrade tomorrow; sell now.” The message discloses a planned research action before release and urges immediate trading. Its single recipient and short format do not reduce the concern. The analyst should not send it; the rating change needs the proper approval and dissemination sequence, with communications retained under applicable procedures.
Watch the distinction: A text is not exempt because it looks informal. Its substance can disclose an unpublished recommendation, distort distribution, and create a recordkeeping issue.
Reference: [2]
59. Distribute research by email
An email distributing research has several parts that readers may see separately: subject line, preview text, body, attachment, and links. Each should accurately reflect the approved report. Begin by confirming the current rating, target, principal reason for any change, and release timing. Then check the recipient list and whether each recipient should receive the communication through that channel. A strong subject line that contradicts a cautious report can mislead even if the attachment is correct, since some readers may never open it. Keep key context close to the headline claim and direct readers to the full analysis and disclosures. Avoid adding a new recommendation in the email body that has not gone through the report process. Retain the communication and distribution details under applicable procedures so its content and timing can be reconstructed.
Worked example: An approved report cuts Company G’s target to $30 because forecast cash flow fell. The proposed email subject says, “Strong upside ahead.” That headline conflicts with the stated reason for the revision. A faithful subject would identify the target cut, while the body briefly explains the lower cash-flow forecast and links the approved report. Send it to the intended audience at the approved release time.
Watch the distinction: An accurate attachment does not excuse a misleading subject line. Readers encounter the email summary first, so it must convey the approved view fairly.
Reference: [2]
60. Adapt research for public and digital channels
Research may appear on a firm website, an internal squawk box, an external news feed, social media, video, or a podcast. Each channel changes the amount of context available and how quickly a claim spreads, but the analytical obligation remains: state the view accurately, preserve material conditions, and address relevant conflicts. Start with the core claim and ask whether it can stand alone without misleading a viewer who never opens the full report. A short clip may need to name the key assumption and downside risk in the clip itself, then point to the fuller analysis. Check that ratings, targets, dates, and prices match the approved research. An internal squawk message also deserves care because it can influence trading or sales conversations. Keep a record of the content, channel, audience, and release timing under applicable procedures.
Worked example: A video says Company H has 30% upside, but the underlying target assumes renewal of a major contract. Revise the clip to say the modeled upside depends on renewal and that failure to renew is the principal risk. Link the full report for detail. Without that condition, a viewer could read the 30% figure as an unconditional forecast.
Watch the distinction: A short digital format does not justify dropping the assumption that drives the conclusion. A link to the report adds detail but cannot make a misleading clip accurate.
Reference: [2]
Official references and further reading
- Series 86 and 87 – Research Analyst Exams | FINRA.org
- FINRA Research Analyst Qualification Examination Series 86