Reference

Formula sheet

31 formulas with what each symbol means, a worked example and the way the exam tries to trip you. The exam centre gives you Excel or LibreOffice Calc; know the formula before you know the spreadsheet.

Chapter 3 · Terminology in Equity and Debt Markets

Open chapter
Market Capitalisation
Market cap = Share price x Number of outstanding equity shares
  • Share price = current market price of one share
  • Number of shares = total equity shares issued and outstanding
Example: Share price Rs. 250 and 10 crore shares: market cap = 250 x 10 crore = Rs. 2,500 crore.
Use: Market value of the equity portion only. It sizes the company and feeds P/E and P/B.
Trap: It ignores debt and cash, so it is NOT the value of the whole business. Use Enterprise Value for that.
Enterprise Value (EV)
EV = Market cap + Total debt - Cash & cash equivalents
  • Market cap = equity market value
  • Total debt = short-term + long-term borrowings
  • Cash = cash and liquid investments
Example: Market cap Rs. 2,500 cr, debt Rs. 600 cr, cash Rs. 100 cr: EV = 2,500 + 600 - 100 = Rs. 3,000 cr.
Use: Value of the whole firm to all capital providers (equity + debt). Use for EV/EBITDA, EV/Sales, and to compare firms with different debt.
Trap: You ADD debt and SUBTRACT cash. A cash-rich company has EV below its market cap.
Earnings Per Share (EPS)
EPS = PAT / Number of equity shares
  • PAT = profit after tax (net profit)
  • Number of equity shares = shares outstanding
Example: PAT Rs. 90 cr and 30 cr shares: EPS = 90 / 30 = Rs. 3 per share.
Use: Profit earned per share. It feeds into P/E and earnings yield.
Trap: Use the same share-count basis (basic vs diluted) on both sides when you compare.
P/E Ratio
P/E = Market price per share / EPS
  • Market price = current share price
  • EPS = earnings per share (trailing, current, or forward)
Example: Price Rs. 300, EPS Rs. 10: P/E = 300 / 10 = 30x. You pay Rs. 30 for every Rs. 1 of yearly earnings.
Use: How expensive a share is relative to its earnings. Compare with peers and the company's own history.
Trap: A low P/E is not automatically cheap. Check if earnings are depressed, one-off, or risky. Note whether EPS is trailing or forward.
Current Yield (bond)
Current yield = Annual coupon / Current market price
  • Annual coupon = yearly interest in rupees
  • Current market price = traded price of the bond
Example: Bond pays Rs. 100 a year and trades at Rs. 900: current yield = 100 / 900 = 11.11%.
Use: Quick income yield on a bond at today's price.
Trap: It ignores the capital gain or loss to maturity. YTM captures full return; current yield does not.

Chapter 8 · Company Analysis: Financial Analysis

Open chapter
EBITDA Margin
EBITDA margin = EBITDA / Net sales
  • EBITDA = earnings before interest, tax, depreciation and amortisation
  • Net sales = revenue after returns and discounts
Example: EBITDA Rs. 220 cr on sales Rs. 1,000 cr: margin = 220 / 1,000 = 22%.
Use: Operating profitability before depreciation, financing and tax. Good for comparing firms with different depreciation/tax/debt.
Trap: It is not cash profit and ignores capex and interest. A high EBITDA margin with heavy debt can still give weak net profit.
PAT Margin
PAT margin = PAT / Net sales
  • PAT = profit after all expenses, interest and tax
  • Net sales = revenue
Example: PAT Rs. 90 cr on sales Rs. 1,000 cr: margin = 9%.
Use: Final bottom-line profit left for shareholders per rupee of sales.
Trap: Can be distorted by one-off gains or tax changes. Separate recurring profit from one-offs.
Return on Equity (ROE)
ROE = PAT / Net worth
  • PAT = profit after tax
  • Net worth = Equity share capital (face value) + Reserves & surplus
  • Use AVERAGE net worth = (opening + closing) / 2
Example: PAT Rs. 90 cr, average net worth Rs. 600 cr: ROE = 90 / 600 = 15%.
Use: Return generated on shareholders' funds. The headline efficiency number for equity investors.
Trap: Leverage can inflate ROE. Always read ROE alongside debt levels and the DuPont breakdown.
Return on Capital Employed (ROCE)
ROCE = EBIT / Capital employed
  • EBIT = earnings before interest and tax (operating profit)
  • Capital employed = Total assets - non-interest-bearing current liabilities, roughly Equity + Debt
  • Use average capital employed
Example: EBIT Rs. 150 cr, capital employed Rs. 1,000 cr: ROCE = 15%.
Use: Pre-tax return on ALL capital (equity + debt). Compares firms with different financing fairly.
Trap: Uses EBIT (pre-interest), not PAT. Do not mix it up with ROE, which uses PAT and equity only.
Debt to Equity (D/E)
D/E = Total adjusted debt / Net worth
  • Total adjusted debt = all interest-bearing liabilities (short + long term)
  • Net worth = equity capital + reserves
Example: Debt Rs. 600 cr, net worth Rs. 1,200 cr: D/E = 0.5x.
Use: Leverage gauge. A conservative benchmark is D/E of 1 or below, then adjust for industry and track record.
Trap: Definitions vary (total debt vs net debt vs only long-term debt). Stay consistent.
Interest Coverage
Interest coverage = EBIT / Interest expense
  • EBIT = operating profit before interest and tax
  • Interest expense = interest on borrowings
Example: EBIT Rs. 150 cr, interest Rs. 50 cr: coverage = 3.0x (earnings cover interest 3 times).
Use: Ability to service interest from operating profit. Higher is safer.
Trap: A ratio below 1 means EBIT cannot even cover interest, a serious distress signal (e.g. Kingfisher Airlines).
Current Ratio
Current ratio = Current assets / Current liabilities
  • Current assets = cash, receivables, inventory, etc.
  • Current liabilities = dues payable within a year
Example: Current assets Rs. 300 cr, current liabilities Rs. 200 cr: 1.5x.
Use: Short-term liquidity. Above 1 means current assets exceed current liabilities.
Trap: Below 1 is not always bad. Firms that collect cash on sale and pay suppliers on credit run on negative working capital, which is favourable.
Quick Ratio
Quick ratio = (Current assets - Inventory) / Current liabilities
  • Excludes inventory, the least liquid current asset
  • Keeps cash, liquid investments and receivables
Example: Current assets Rs. 300 cr, inventory Rs. 80 cr, current liabilities Rs. 200 cr: (300 - 80) / 200 = 1.10x.
Use: Stricter liquidity test than the current ratio.
Trap: Only INVENTORY is removed, not receivables. Do not subtract receivables.
Asset Turnover
Asset turnover = Net sales / Total assets
  • Net sales = revenue
  • Total assets = average total assets
Example: Sales Rs. 2,000 cr, assets Rs. 1,500 cr: 1.33x. Each rupee of assets generates Rs. 1.33 of sales.
Use: How efficiently assets generate revenue. One of the three DuPont drivers.
Trap: Low turnover is normal for capital-heavy firms, high for asset-light ones. Compare within the industry.
DuPont ROE
ROE = Net profit margin x Asset turnover x Equity multiplier
  • Net profit margin = PAT / Sales (profitability)
  • Asset turnover = Sales / Assets (efficiency)
  • Equity multiplier = Assets / Equity (leverage)
Example: 9% margin x 1.33 turnover x 1.25 leverage = 15% ROE.
Use: Splits ROE into profitability, efficiency and leverage so you see WHY ROE changed.
Trap: ROE rising only from higher leverage (equity multiplier) is lower quality and riskier than ROE rising from margin or efficiency.

Chapter 9 · Corporate Actions

Open chapter
Theoretical Ex-Rights Price (TERP)
TERP = (Cum-rights value of holding + Rights subscription amount) / Total shares after rights
  • Cum-rights value = existing shares x cum-rights price
  • Rights amount = new shares x rights issue price
Example: Hold 400 @ Rs. 250 (= 1,00,000); 1:4 rights of 100 shares @ Rs. 150 (= 15,000): TERP = 1,15,000 / 500 = Rs. 230.
Use: Fair price of a share just after a rights issue, ignoring market movement.
Trap: Use the CUM-rights (pre-adjustment) price for existing shares, not a guessed post price.
Ex-Bonus / Ex-Split Price
Adjusted price = Cum price x (Old shares / New shares)
  • 1:1 bonus doubles shares, so price roughly halves
  • A 2-for-1 split doubles shares and halves face value and price
Example: Rs. 400 before a 1:1 bonus becomes about Rs. 200 after. Your total value is unchanged.
Use: Adjust price for a bonus or split. Economic value of your holding does not change.
Trap: Bonus and split change share count and per-share price, not the total value you hold or the cash in the company.

Chapter 10 · Valuation Principles

Open chapter
Gordon Growth Model (DDM)
P0 = D1 / (Ke - g)
  • P0 = fair value today
  • D1 = expected dividend next year
  • Ke = cost of equity
  • g = constant long-term dividend growth
Example: D1 Rs. 8, Ke 13.2%, g 4%: P0 = 8 / (0.132 - 0.04) = 8 / 0.092 = Rs. 86.96.
Use: Values a mature, stable dividend payer as a perpetuity growing at g.
Trap: Only works when g < Ke. If g is greater than or equal to Ke the formula breaks (negative or infinite value).
Cost of Equity (CAPM)
Ke = Rf + Beta x (Rm - Rf)
  • Rf = risk-free rate
  • Beta = sensitivity to the market
  • Rm = expected market return
  • (Rm - Rf) = market risk premium
Example: Rf 6%, Beta 1.2, Rm 12%: Ke = 6% + 1.2 x (12% - 6%) = 6% + 7.2% = 13.2%.
Use: Required return for equity holders. It is the discount rate for FCFE and the equity cost inside WACC.
Trap: Multiply beta by the PREMIUM (Rm - Rf), not by Rm. Beta above 1 pushes Ke above the market return.
WACC
WACC = Ke x We + Kd x (1 - tax) x Wd
  • Ke = cost of equity, We = weight of equity
  • Kd = pre-tax cost of debt, Wd = weight of debt
  • tax = corporate tax rate
Example: Ke 14% x 0.6 + 10% x (1 - 0.30) x 0.4 = 8.4% + 2.8% = 11.2%.
Use: Blended cost of all capital. The discount rate for FCFF (whole-firm valuation).
Trap: Use AFTER-tax cost of debt because interest is tax-deductible (the tax shield). Do not tax-adjust equity.
Dividend Yield
Dividend yield = Dividend per share / Current price
  • DPS = annual dividend per share
  • Current price = market price
Example: DPS Rs. 5, price Rs. 200: 2.5%.
Use: Income return from dividends alone, before any capital gain.
Trap: A very high yield can signal a falling price or an unsustainable payout, not a bargain.
Earnings Yield
Earnings yield = EPS / Current price
  • EPS = earnings per share
  • Current price = market price
Example: EPS Rs. 10, price Rs. 100: 10%. This is simply 1 / P/E.
Use: Earnings return per rupee invested. Lets you compare equities against bond yields.
Trap: It is the reciprocal of P/E (1 / P/E), not the P/E itself.
PEG Ratio
PEG = P/E ratio / Earnings growth rate (%)
  • P/E = price-to-earnings multiple
  • Growth = expected annual EPS growth in percent
Example: P/E 30, growth 20%: PEG = 30 / 20 = 1.5.
Use: Adjusts P/E for growth. Around 1 is often seen as fair; below 1 may be attractive IF growth is real.
Trap: A cheap PEG is meaningless if the growth assumption is too optimistic or unsustainable.
EV / Sales
EV / Sales = Enterprise value / Sales
  • EV = enterprise value
  • Sales = revenue
Example: EV Rs. 3,000 cr, sales Rs. 1,000 cr: 3.0x.
Use: Useful when earnings are negative or volatile but revenue is meaningful (early-stage or new-age firms).
Trap: It ignores profitability, so it is only valid if the firm can plausibly become profitable.

Chapter 12 · Fundamentals of Risk and Return

Open chapter
Holding Period Return (HPR)
HPR = (Ending value - Beginning value + Income) / Beginning value
  • Income = dividends or coupons received during the period
  • Beginning/Ending value = price at start/end
Example: Buy at Rs. 100, sell at Rs. 110, dividend Rs. 5: (110 - 100 + 5) / 100 = 15%.
Use: Total return over the full holding period, before annualising.
Trap: Include income (dividend or coupon), not just the price change.
CAGR
CAGR = (Ending value / Beginning value)^(1 / years) - 1
  • Ending/Beginning value = portfolio or price at end/start
  • years = number of years
Example: Rs. 5,00,000 grows to Rs. 6,65,500 in 3 years: (6,65,500 / 5,00,000)^(1/3) - 1 = (1.331)^(1/3) - 1 = 10%.
Use: Smoothed compounded annual return between two points in time.
Trap: It is compounded, not total return divided by years. CAGR hides the volatility along the way.
Expected Return
Expected return = Sum of (Probability x Outcome)
  • Probability = chance of each scenario (must sum to 1)
  • Outcome = return in that scenario
Example: 0.5 x 20% + 0.3 x 10% + 0.2 x (-5%) = 10% + 3% - 1% = 12%.
Use: Probability-weighted average return across scenarios.
Trap: Probabilities must add up to 100%. The expected value may not equal any single actual outcome.
Sharpe Ratio
Sharpe = (Portfolio return - Risk-free rate) / Standard deviation
  • Portfolio return = realised or expected return
  • Risk-free rate = e.g. T-bill yield
  • Standard deviation = total risk / volatility
Example: (12% - 6%) / 15% = 0.40. The portfolio earns 0.4% of excess return per 1% of risk.
Use: Risk-adjusted return: return per unit of TOTAL risk. Higher is better.
Trap: The denominator is standard deviation (total risk), not beta. The beta version is the Treynor ratio.

Chapter 15 · Technical Analysis

Open chapter
MACD
MACD line = 12-period EMA - 26-period EMA; Signal line = 9-period EMA of MACD
  • EMA = exponential moving average
  • 12 EMA = fast, 26 EMA = slow
  • Signal line = 9 EMA of the MACD line
Example: When the MACD line crosses above the signal line and both are rising, it is a bullish momentum signal.
Use: Trend-following momentum indicator. Crossovers and divergences flag momentum shifts.
Trap: It shows momentum, not price level. A crossover of the zero line on its own is not a trade signal.
RSI
RSI = 100 - [100 / (1 + RS)], RS = Average gain / Average loss
  • RS = ratio of average gains to average losses over the period (default 14)
  • Plotted on a 0 to 100 scale
Example: Above 70 = overbought, below 30 = oversold. RSI 78 with price at a higher high but RSI at a lower high = bearish divergence.
Use: Momentum oscillator to spot overbought/oversold conditions and divergences.
Trap: In a strong trend RSI can stay overbought or oversold for a long time. It is a warning, not an automatic buy or sell.
On Balance Volume (OBV)
OBV = Previous OBV + Volume (if close is up) - Volume (if close is down)
  • Add the day's volume when close is above the previous close
  • Subtract the day's volume when close is below it
  • Read OBV with its 20-period average
Example: Rising OBV confirms a rising price trend. OBV falling while price rises warns of weak, unconfirmed demand.
Use: Volume-based confirmation of a price trend. Divergences can precede reversals.
Trap: It confirms trend through volume. It is not a price target or an overbought/oversold gauge.