NISM Series XV · Unit 7 of 15 · about 6% of the paper
Company analysis: business and governance: NISM Series XV notes and practice questions
Before the numbers, understand the business and the people running it.
What to know in Unit 7
- Business model and moat.
- Management quality.
- Corporate governance red flags.
Key terms, examples and exam traps
Business model
A business model describes how a company creates, delivers and captures value, and what drives its revenue and costs.
Example. An analyst maps how a company earns each rupee of revenue.
Exam trap. This statement is false: A business model is the company's balance sheet.
Economic moat
An economic moat is a durable competitive advantage, such as brand, network effect, cost advantage or switching cost, protecting long-term profits.
Example. A strong brand allows a company to charge premium prices for years.
Exam trap. This statement is false: An economic moat is a short-lived advantage.
Management quality
Management quality is judged by track record, capital allocation, transparency, integrity and alignment with shareholders.
Example. An analyst reviews how past acquisitions performed and whether guidance was met.
Exam trap. This statement is false: Management quality is irrelevant if the numbers are good.
Corporate governance
Corporate governance is the system of rules and practices by which a company is directed and controlled, protecting shareholders' interests.
Example. Independent directors, audit committee and transparent disclosures.
Exam trap. This statement is false: Corporate governance is only about paying dividends.
Board independence
Independent directors on the board and its committees provide oversight free from management and promoter influence.
Example. A board has independent directors chairing the audit committee.
Exam trap. This statement is false: Independent directors are promoter relatives.
Related-party transactions
Dealings between a company and its promoters or their entities may favour insiders, so they require disclosure and approval.
Example. A company buys goods from an entity owned by the promoter's family.
Exam trap. This statement is false: Related-party transactions need no disclosure.
Promoter pledge
Pledging of promoter shares to raise loans is a red flag, because a price fall can lead to forced sale and loss of control.
Example. Promoters have pledged a large share of their stake.
Exam trap. This statement is false: A high promoter pledge is a positive sign.
Auditor red flags
Frequent changes of auditors, qualified audit opinions and delays in results can signal accounting or governance problems.
Example. An auditor resigns mid-year citing lack of information.
Exam trap. This statement is false: A qualified opinion is a sign of clean accounts.
Capital allocation
Capital allocation is how management uses cash: reinvesting, acquiring, repaying debt or returning cash to shareholders.
Example. A company uses free cash flow to buy back shares and cut debt.
Exam trap. This statement is false: Capital allocation means issuing more debt.
ESG
Environmental, social and governance factors affect long-term risk and returns and are increasingly part of research.
Example. An analyst reviews a company's emissions and labour practices.
Exam trap. This statement is false: ESG factors have no financial relevance.
Disclosure quality
Transparent, timely and consistent disclosure builds trust; poor or selective disclosure is a warning sign.
Example. A company explains its results and risks in detail.
Exam trap. This statement is false: Disclosures are only a legal formality.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? Frequent changes of auditors, qualified audit opinions and delays in results can signal accounting or governance problems.
- Auditor red flags
- Prohibited compensation
- Corporate governance
- Leading indicators
Q2. Which statement best describes “Corporate governance”?
- SEBI regulates the securities market, RBI the money market and banks, and exchanges oversee their members.
- Listed companies must make continuous disclosures under the SEBI listing regulations, which are the primary source of information for analysts.
- Corporate governance is the system of rules and practices by which a company is directed and controlled, protecting shareholders' interests.
- The trading restrictions and disclosure duties also apply to an analyst's associates and relatives where specified in the regulations.
Q3. Which statement best describes “Capital allocation”?
- Fiscal policy is the government's use of taxation and spending to influence the economy.
- The Treynor ratio is excess return divided by beta, measuring return per unit of systematic risk.
- Capital allocation is how management uses cash: reinvesting, acquiring, repaying debt or returning cash to shareholders.
- The bottom-up approach starts with individual company analysis and gives less weight to macro and sector views.
Q4. Which term is described here? An economic moat is a durable competitive advantage, such as brand, network effect, cost advantage or switching cost, protecting long-term profits.
- Economic moat
- CPI and WPI
- Assured returns prohibited
- Inventory days
Q5. Which statement best describes “Board independence”?
- Earnings are high quality when they are backed by cash flows, repeatable and not inflated by one-offs or aggressive accounting.
- When an analyst makes a public appearance, she must disclose any conflicts or holdings in the stocks she discusses.
- An individual research analyst must hold the prescribed qualification and the NISM research analyst certification and meet other norms.
- Independent directors on the board and its committees provide oversight free from management and promoter influence.
Q6. Which statement best describes “Business model”?
- Each recommendation must be supported by research data and a rating system, and reports must carry the required disclaimers and disclosures.
- The PEG ratio divides the P/E by the expected earnings growth rate, adjusting the multiple for growth.
- A business model describes how a company creates, delivers and captures value, and what drives its revenue and costs.
- The cup and handle is a bullish continuation pattern with a rounded bottom followed by a small pullback before a breakout.
Frequently asked questions
How much of NISM Series XV comes from Unit 7?
Unit 7 (Company analysis: business and governance) usually carries about 6% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XV Unit 7?
Business model and moat. Management quality. Corporate governance red flags.
Are these NISM Series XV practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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