Free CISI IRT Practice Questions: Fundamental Analysis

Use this focused CISI IRT page as a short practice test for Fundamental Analysis. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Fundamental Analysis

An adviser is carrying out a portfolio review for a UK client. The updated fact-find confirms that the client’s income objective, time horizon, attitude to risk, capacity for loss, and tax-wrapper position are unchanged. The portfolio includes a long-duration gilt fund, instant access cash for emergencies, and a small broad commodities allocation. The firm’s macro-economic note now expects persistent above-target inflation, two likely Bank of England rate rises, and an oil supply disruption. Before making any fund switch recommendation, what is the best next step?

• A. Proceed directly to a short-duration bond fund recommendation, because the client’s risk profile and tax-wrapper position are unchanged.
• B. Sell the commodities allocation first, because higher interest rates automatically make commodities unsuitable for clients with limited capacity for loss.
• C. Map the macro assumptions to the current exposures: rate rises may hurt long-duration gilt prices, cash rates may improve but real returns remain at risk, and oil-linked commodities may be supported by the supply shock.
• D. Ask the client to choose which asset class will perform best, then record that preference as the basis for the recommendation.

Best answer: C

What this tests: Fundamental Analysis

Explanation: Once the core suitability facts have been updated, the next review step is to interpret the macro-economic changes in relation to the assets already held. Expected interest rate rises generally put downward pressure on fixed income prices, especially longer-duration gilts. Cash deposit rates may improve as base rates rise, but persistent inflation can still reduce purchasing power. An oil supply disruption may support some commodity prices, although commodities remain volatile and should be assessed within the client’s agreed risk profile and diversification limits. Product selection should follow this analysis, not replace it.

• Moving straight to a short-duration bond fund skips the analysis of all affected holdings, including cash and commodities.
• Automatically selling commodities overstates the effect of higher rates and ignores the possible price impact of an oil supply shock.
• Asking the client to pick the winning asset class gives the client the wrong role; the adviser must analyse suitability and make a reasoned recommendation.

The adviser should first analyse how the changed macro conditions affect the client’s existing fixed income, cash, and commodity exposures before selecting replacements.

Question 2

Topic: Fundamental Analysis

An analyst is comparing two UK listed companies in the same sector. EBITDA margin is EBITDA divided by revenue. ROCE is operating profit divided by average capital employed.

• Company A: revenue £500m; EBITDA £100m; operating profit £75m; average capital employed £500m.
• Company B: revenue £400m; EBITDA £92m; operating profit £56m; average capital employed £350m.
• Sector benchmark: EBITDA margin 20%; ROCE 15%.

Which interpretation is correct?

• A. Company B has the higher EBITDA margin and higher ROCE, while Company A is exactly in line with both sector benchmarks.
• B. Company B exceeds the EBITDA margin benchmark but falls below the ROCE benchmark.
• C. Company A has the higher ROCE because its operating profit is higher in absolute pounds.
• D. Company A has the higher EBITDA margin because its EBITDA is higher in absolute pounds.

Best answer: A

What this tests: Fundamental Analysis

Explanation: Accounting ratios compare performance relative to the size of the business, not just the absolute pound amounts. Company A’s EBITDA margin is £100m divided by £500m, which is 20%, and its ROCE is £75m divided by £500m, which is 15%. It is exactly in line with both sector benchmarks. Company B’s EBITDA margin is £92m divided by £400m, which is 23%, and its ROCE is £56m divided by £350m, which is 16%. Company B is therefore above both benchmarks and stronger than Company A on these two ratio measures, even though its EBITDA and operating profit are lower in absolute terms.

• Using absolute EBITDA or operating profit ignores the purpose of margin and ROCE analysis.
• Company A’s larger pound profits do not make it more efficient relative to revenue or capital employed.
• Company B does not fall below the ROCE benchmark; £56m divided by £350m is 16%, above 15%.

Company B has an EBITDA margin of 23% and ROCE of 16%, while Company A has 20% and 15% respectively.

Question 3

Topic: Fundamental Analysis

Which statement correctly distinguishes EBITDA from return on capital employed (ROCE) when comparing companies in fundamental analysis?

• A. EBITDA measures operating earnings before interest, tax, depreciation and amortisation; ROCE measures operating profit relative to capital employed.
• B. EBITDA measures dividend income as a percentage of share price; ROCE measures total dividends covered by profits.
• C. EBITDA measures profit after tax per ordinary share; ROCE measures share price relative to earnings per share.
• D. EBITDA measures capital employed as a percentage of revenue; ROCE measures earnings before depreciation and amortisation.

Best answer: A

What this tests: Fundamental Analysis

Explanation: EBITDA is a profit measure used to compare operating performance before the effects of interest, tax, depreciation and amortisation. It can help when companies have different financing structures or depreciation policies, although it is not the same as cash flow. ROCE is a ratio: it compares operating profit with capital employed, so it indicates how effectively a company uses its long-term capital to generate returns. In company analysis, EBITDA gives a view of operating earnings, while ROCE gives a measure of capital efficiency.

• Profit after tax per ordinary share describes earnings per share, and share price relative to earnings per share describes the P/E ratio.
• Dividend income as a percentage of share price is dividend yield, while dividend cover compares profits with dividends.
• Capital employed as a percentage of revenue is not EBITDA, and earnings before depreciation and amortisation alone does not describe ROCE.

EBITDA focuses on operating earnings before financing, tax and certain non-cash charges, while ROCE assesses how efficiently capital is used to generate operating profit.

Question 4

Topic: Fundamental Analysis

In fundamental analysis, which statement best describes how information asymmetry, industry structure, and competitive conditions can affect company or sector prospects?

• A. Information asymmetry usually improves market confidence, while low entry barriers and intense rivalry help protect margins.
• B. Competitive conditions are relevant only where products are identical and companies cannot differentiate their offering.
• C. Persistent information gaps can weaken investor or customer confidence, while high entry barriers and limited rivalry can help protect margins.
• D. Industry structure matters mainly for short-term share price volatility, not for expected sector profitability.

Best answer: C

What this tests: Fundamental Analysis

Explanation: Industry analysis looks beyond a company’s accounts to the conditions that shape future profits. Information asymmetry exists when one party has better information than another, which can reduce confidence, increase perceived risk, or make buyers and investors demand a lower price or higher return. Industry structure also matters: high barriers to entry, limited substitutes, weaker customer bargaining power, and less intense rivalry can allow companies to sustain margins. By contrast, low barriers to entry, strong substitutes, powerful buyers, or aggressive price competition tend to erode profitability and weaken sector prospects.

• Treating information asymmetry as confidence-enhancing reverses the usual concern: uncertainty can reduce demand or raise the return investors require.
• Treating industry structure as only a source of short-term volatility misses its effect on long-term profitability and cash flows.
• Limiting competition to identical products ignores differentiation, substitute products, customer power, and supplier power.

Information asymmetry can increase uncertainty, while favourable industry structure and weaker competition can support pricing power and profitability.

Question 5

Topic: Fundamental Analysis

An adviser is reviewing an analyst’s upgrade of a UK-listed engineering company from neutral to positive. The analyst notes that UK GDP, inflation and Bank Rate forecasts are unchanged, but the company has won two new framework contracts and announced a cost-reduction programme.

Key figures:

• Current share price: 650p
• Revised forecast earnings per share: 50p
• Previous forecast earnings per share: 40p
• Sector average forward P/E: 15 times

Using the forward P/E calculation, which conclusion best identifies the main driver of the positive view?

• A. Company-specific analysis, because the revised forward P/E is 13.0 times and the upgrade is linked to contracts and cost reductions.
• B. Macro-economic analysis, because unchanged interest-rate and inflation forecasts mean systematic risk has fallen.
• C. Macro-economic analysis, because 50p divided by 650p gives 7.7%, indicating a general market yield.
• D. Company-specific analysis, because the forward P/E should use the previous EPS forecast, giving 16.25 times.

Best answer: A

What this tests: Fundamental Analysis

Explanation: Company-specific analysis focuses on factors that affect the individual company, such as new contracts, cost control, margins, management quality and earnings forecasts. Macro-economic analysis focuses on economy-wide factors such as GDP growth, inflation, interest rates and exchange rates. Here, the forward P/E uses the revised forecast EPS: 650p divided by 50p = 13.0 times, which is below the sector average of 15 times. More importantly, the reason for the upgrade is the company’s contract wins and cost-reduction programme. The macro-economic assumptions are stated as unchanged, so they are not the main driver of the investment view.

• Reversing the P/E formula gives an earnings-yield style figure, not a forward P/E ratio.
• Unchanged inflation and Bank Rate forecasts do not show that macro conditions have improved.
• Using the previous EPS forecast ignores the revised company earnings forecast that prompted the upgrade.

The forward P/E is 650p divided by 50p, or 13.0 times, and the decisive facts relate to the company rather than the economy.

Question 6

Topic: Fundamental Analysis

An adviser is reviewing the following research note before selecting a UK listed property company for a client.

• Client objective: add listed property exposure; income reliability is more important than development-led capital growth; accepts equity-market price volatility.
• Company A: convenience-led retail parks; occupancy 97%; weighted average unexpired lease term 8 years; loan-to-value 31%; shares at 10% discount to net asset value; forecast dividend yield 5.0%.
• Company B: city office developments; 40% pre-let; loan-to-value 57%; shares at 20% premium to net asset value; no forecast dividend; rising local vacancy and several competing schemes.

Which action is best supported by the note?

• A. Prefer Company A because its occupancy, lease length, lower gearing and valuation better support the client’s income priority.
• B. Prefer Company B because a 20% premium to net asset value means the shares can be bought below the asset value.
• C. Prefer Company B because higher loan-to-value reduces the impact of weaker office demand on shareholders.
• D. Prefer Company A only if the client needs guaranteed income with no capital risk.

Best answer: A

What this tests: Fundamental Analysis

Explanation: A basic property-company selection should combine sector context with company and property metrics. Company A has high occupancy, a long average lease term, lower loan-to-value and a forecast dividend, all of which better support a client seeking relatively dependable income. Its retail-park focus is also supported by the note’s income characteristics, although it still carries property and equity-market risk. Company B is more speculative: it is development-led, only partly pre-let, more highly geared, pays no forecast dividend and faces an office market with rising vacancy and competing supply. A premium to net asset value is not the same as buying assets cheaply; it indicates the shares trade above the stated asset value.

• A premium to net asset value means the market price is above stated asset value, not below it.
• Higher loan-to-value increases financial risk and can magnify downside when property demand weakens.
• Long leases and high occupancy may support income, but they do not create guaranteed income or remove capital risk.

Company A is better aligned with the client’s income objective and has stronger property fundamentals than the development-led alternative.

Question 7

Topic: Fundamental Analysis

An adviser is reviewing macro data before meeting a UK client whose portfolio has a sizeable allocation to UK equity funds. Recent indicators are:

• Real GDP growth has slowed to near zero.
• CPI inflation remains above target and Bank Rate has recently risen.
• Retail sales volumes and industrial production have both fallen.
• Unemployment claims have started to rise.
• Sterling has weakened against the US dollar.
• The FTSE 250 has underperformed the FTSE 100.

Which assessment best applies these indicators in fundamental analysis?

• A. FTSE 100 relative strength proves UK domestic demand is healthy, so falling retail sales can be ignored.
• B. The data point to a slowing economy with inflationary pressure, so domestic cyclicals may be more vulnerable while overseas earners may receive sterling translation support.
• C. Sterling weakness should be treated as negative for every UK-listed company, because overseas revenues translate into fewer pounds.
• D. The data point to a broad expansion, because rising rates and high inflation normally confirm improving earnings momentum.

Best answer: B

What this tests: Fundamental Analysis

Explanation: Macro indicators should be read together rather than in isolation. Near-zero GDP growth, falling retail sales and declining industrial production point to weaker demand and output. Rising unemployment claims reinforce the slowdown signal because labour-market conditions are beginning to soften. Above-target inflation and a rising Bank Rate point to pressure on household spending, company borrowing costs and valuation multiples. Exchange-rate and index signals also need interpretation: a weaker pound can hurt importers but can support sterling-reported earnings of companies with substantial overseas revenues. FTSE 250 underperformance compared with the FTSE 100 is consistent with weaker domestic conditions, because the FTSE 250 is generally more exposed to the UK economy while many FTSE 100 constituents earn globally.

• Treating high inflation and rate rises as a simple expansion signal ignores the tightening effect on consumers, borrowers and valuations.
• FTSE 100 strength can reflect overseas revenue and currency effects, so it is not proof of healthy UK domestic demand.
• Sterling weakness has mixed effects: it can raise import costs but improve translated overseas earnings.

Taken together, the data indicate weaker domestic activity and tighter monetary conditions, with weaker sterling potentially supporting companies earning foreign currency revenues.

Question 8

Topic: Fundamental Analysis

A UK adviser is reviewing the bond allocation in a medium-term ISA portfolio. The client can accept some capital fluctuation but wants lower equity-market exposure. The adviser expects UK inflation to fall, the Bank of England to cut Bank Rate, and gilt yields to decline. Which asset class is most likely to benefit from this backdrop?

• A. Broad commodity funds
• B. Cash deposits
• C. UK small-cap equities
• D. Long-dated conventional UK gilts

Best answer: D

What this tests: Fundamental Analysis

Explanation: Conventional fixed-interest bonds are strongly influenced by interest-rate expectations and market yields. When inflation is expected to fall and the central bank is expected to cut rates, investors often anticipate lower bond yields. Because bond prices move inversely to yields, existing fixed-coupon gilts would generally rise in price. Longer-dated gilts usually have higher duration, so they are more sensitive to changes in yields than short-dated bonds or cash. The client facts also point away from a pure equity or commodity exposure because the review is within a lower-equity, medium-term ISA allocation.

• Cash deposits may provide capital stability, but returns typically fall as Bank Rate is cut.
• Broad commodity funds are more often supported by inflationary or supply-driven conditions, not falling inflation and easier monetary policy.
• UK small-cap equities could benefit from easier policy, but they add higher equity risk and are less directly linked to falling gilt yields than gilts.

Falling interest rates and gilt yields would tend to increase prices of existing fixed-coupon gilts, with longer-dated issues usually more sensitive.

Question 9

Topic: Fundamental Analysis

An adviser is reviewing a client’s holding in a listed UK retailer and has extracted the following year-on-year ratios from the annual report.

Which interpretation is best supported by the ratio snapshot?

• A. Profitability has improved because the current ratio is higher, but efficiency has deteriorated because the price/earnings ratio is lower.
• B. Solvency has improved because gearing is higher, and liquidity has weakened because inventory days have increased.
• C. Profitability has weakened, liquidity has improved, solvency risk has increased, efficiency has deteriorated, and the market rating has fallen.
• D. The company is clearly undervalued because the price/earnings ratio has fallen while the current ratio has improved.

Best answer: C

What this tests: Fundamental Analysis

Explanation: Financial ratios are useful only when the ratio type is interpreted correctly. Operating profit margin is a profitability measure, and its fall from 9.0% to 6.5% indicates weaker profitability. The current ratio is a liquidity measure, and its rise from 0.9:1 to 1.3:1 suggests improved short-term asset cover for liabilities. Gearing is a solvency or financial-risk measure; a rise from 42% to 68% indicates greater reliance on debt. Inventory days is an efficiency measure; a longer period suggests stock is taking more time to turn into sales. The price/earnings ratio is an investor or valuation ratio; a fall from 18x to 12x indicates a lower market rating, but does not by itself prove the shares are cheap or suitable.

• Treating the current ratio as profitability confuses liquidity with profit generation.
• Higher gearing normally points to greater financial risk, not improved solvency.
• Longer inventory days indicate weaker stock efficiency, not a liquidity ratio in isolation.
• A lower price/earnings ratio may suggest a lower rating, but undervaluation needs further evidence.

Each conclusion matches the ratio category and direction shown in the snapshot.

Question 10

Topic: Fundamental Analysis

An analyst is reviewing a listed company whose reported profit is distorted by a large non-cash depreciation charge. She wants a valuation measure that compares the share price with cash generated per share, making the comparison less dependent on accounting profit. Which measure matches this purpose?

• A. Gearing
• B. Dividend cover
• C. Price/earnings ratio
• D. Price-to-cash-flow ratio

Best answer: D

What this tests: Fundamental Analysis

Explanation: The price-to-cash-flow ratio is a valuation multiple that relates a company’s share price to the cash flow generated per share. It can be useful where accounting earnings are affected by non-cash charges such as depreciation, amortisation, or impairment. It does not remove the need to assess business quality, sustainability of cash flows, or debt levels, but it helps focus on cash generation rather than reported profit alone. By contrast, earnings-based and dividend-based measures answer different questions: they assess profit valuation or dividend sustainability, not the market price relative to cash flow per share.

• Price/earnings ratio uses earnings per share, so it remains directly tied to accounting profit.
• Dividend cover measures how many times profits cover dividends, not market valuation against cash flow.
• Gearing assesses the level of debt or financial leverage, not the share price relative to cash generation.

The price-to-cash-flow ratio compares the share price with cash flow per share, so it is less directly affected by non-cash accounting charges than earnings-based measures.

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