Series 86 — Research Analyst Qualification Examination (Part I) Quick Reference

Last revised: June 29, 2026

Compact Series 86 reference for research analyst candidates: valuation, financial statement analysis, ratios, economics, fixed income, and quantitative methods.

Exam Focus Snapshot

This Quick Reference supports preparation for FINRA’s Series 86 — Research Analyst Qualification Examination (Part I), exam code Series 86. It emphasizes the analytical skills a research analyst needs: financial statement analysis, valuation, economics, industry/company analysis, quantitative methods, and security analysis.

Area	What to know cold	Common exam angle
Financial statements	Income statement, balance sheet, cash flow statement links	Identify what affects earnings, cash flow, leverage, and quality of earnings
Ratio analysis	Liquidity, profitability, leverage, efficiency, valuation ratios	Interpret direction, not just calculate
Equity valuation	DCF, DDM, multiples, residual income, EPS analysis	Match method to company facts and normalize inputs
Fixed income and credit	Yield, duration, convexity, spreads, credit risk	Distinguish price, yield, spread, and duration effects
Economics and industry analysis	Rates, inflation, FX, cycle sensitivity, competitive forces	Apply macro changes to sectors and issuers
Quantitative methods	Return measures, regression, correlation, sampling, probability	Avoid confusing correlation with causation or statistical significance
Research process	Data integrity, forecasts, assumptions, scenarios	Select reasonable drivers and identify flawed assumptions

Part I distinction: Series 86 is the analytical portion of the research analyst qualification path. Do not treat it as a pure rules exam. Regulatory communications and supervisory topics are primarily associated with the separate research analyst regulatory component.

Core Formula Sheet

Time Value, Return, and Growth

\[ PV = \frac{FV}{(1+r)^n} \]\[ FV = PV(1+r)^n \]\[ NPV = \sum_{t=1}^{n}\frac{CF_t}{(1+r)^t} - Initial\ Investment \]\[ CAGR = \left(\frac{Ending\ Value}{Beginning\ Value}\right)^{1/n} - 1 \]

Concept	Formula or rule	Exam trap
Holding period return	Income plus price change divided by beginning value	Include dividends or interest when given
Arithmetic average	Sum of periodic returns divided by number of periods	Overstates compound experience when volatility exists
Geometric average	Compound rate over multiple periods	Best for multi-period investment performance
Required return	Risk-free rate plus risk premium	Higher risk requires higher discount rate
NPV	PV of inflows minus initial outflow	Accept positive NPV projects if assumptions are valid
IRR	Discount rate that sets NPV to zero	Multiple IRRs can occur with nonconventional cash flows
Real return approximation	Nominal return minus inflation	Exact real return adjusts by one plus inflation

Cost of Capital and Risk

\[ r_e = r_f + \beta(r_m-r_f) \]\[ WACC = w_d r_d(1-T) + w_p r_p + w_e r_e \]

Input	Meaning	Watch for
Risk-free rate	Return on default-free benchmark for matching horizon	Short-term rate may not match long-term equity DCF
Beta	Sensitivity to market returns	Beta measures systematic risk, not total risk
Equity risk premium	Expected market return minus risk-free rate	Higher premium increases cost of equity
Cost of debt	Yield required by lenders	Use after-tax cost when interest is tax-deductible
Capital weights	Market value weights preferred	Book weights may distort WACC
Tax rate	Marginal tax rate usually relevant	Tax shield applies to debt interest, not dividends

Equity Valuation

\[ TV_{\text{Gordon}} = \frac{FCF_{n+1}}{WACC-g} \]\[ Value\ of\ Equity = Enterprise\ Value - Net\ Debt - Preferred\ Stock - Minority\ Interest + Nonoperating\ Assets \]\[ Diluted\ EPS = \frac{Net\ Income - Preferred\ Dividends}{Weighted\ Average\ Diluted\ Shares} \]

Method	Best used when	Key inputs	Common trap
Dividend discount model	Stable dividend-paying company	Dividends, cost of equity, dividend growth	Not appropriate if dividends do not reflect earning power
Free cash flow to firm	Valuing enterprise independent of capital structure	FCFF, WACC, terminal value	Discount FCFF at WACC, not cost of equity
Free cash flow to equity	Equity cash flows after debt effects	FCFE, cost of equity	Discount FCFE at cost of equity
Relative valuation	Comparable firms or transactions exist	Multiple, peer group, normalized metric	Numerator and denominator must match
Residual income	Book value meaningful and dividends unstable	Book value, ROE, cost of equity	Value is created only when ROE exceeds required return
Sum-of-the-parts	Multi-segment company	Segment multiples or DCFs	Use segment-specific peers and avoid double counting debt

Financial Statement Linkages

Statement	Core purpose	High-yield analytical use
Income statement	Measures revenues, expenses, earnings over a period	Margins, EPS, operating leverage, earnings quality
Balance sheet	Shows assets, liabilities, equity at a point in time	Liquidity, leverage, working capital, invested capital
Cash flow statement	Reconciles cash generated and used	CFO quality, capex needs, financing dependence
Statement of equity	Explains equity account changes	Buybacks, dividends, option compensation, retained earnings

Income Statement Reference

Line item	Interpretation	Analyst focus
Revenue	Top-line sales recognized during period	Organic growth, price vs volume, recurring vs one-time
Gross profit	Revenue minus COGS	Product economics and input cost pressure
SG&A	Selling, general, administrative costs	Scalability and cost control
R&D	Investment in future products or services	Expensing may depress current earnings
EBITDA	Earnings before interest, taxes, depreciation, amortization	Proxy for operating earnings, not free cash flow
EBIT	Operating income before financing and taxes	Better for comparing capital structures
Pretax income	Income before tax expense	Affected by operating and financing decisions
Net income	Earnings after all expenses	Basis for EPS, but may include nonrecurring items
EPS	Earnings per share	Use diluted EPS when dilutive securities exist

Margin	Formula	What it reveals
Gross margin	Gross profit divided by revenue	Pricing power and production efficiency
EBITDA margin	EBITDA divided by revenue	Operating cash earnings before capex and working capital
Operating margin	EBIT divided by revenue	Core operating profitability
Pretax margin	Pretax income divided by revenue	Operations plus financing effects
Net margin	Net income divided by revenue	Overall profitability after all expenses

Balance Sheet Reference

Account	What increases it	What decreases it	Analytical signal
Cash	CFO, asset sales, debt/equity issuance	Capex, debt repayment, dividends, buybacks	Liquidity and optionality
Accounts receivable	Credit sales	Customer collections	Rising faster than sales may signal collection risk
Inventory	Purchases or production	COGS recognition	Rising inventory may signal demand weakness
PP&E	Capital expenditures	Depreciation, disposals	Capex intensity and asset age
Goodwill	Acquisitions above fair value of net assets	Impairment	Acquisition history and impairment risk
Accounts payable	Purchases on credit	Vendor payments	Supplier financing and working capital management
Debt	Borrowing	Principal repayment	Leverage and refinancing risk
Shareholders’ equity	Net income, issuance	Losses, dividends, buybacks	Book value and capital base

Cash Flow Statement Reference

Cash flow section	Includes	Does not include	Interpretation
CFO	Cash from operations, working capital changes	Capex and debt issuance	Core cash generation
CFI	Capex, acquisitions, asset sales	Operating expenses	Investment intensity
CFF	Debt issuance/repayment, equity issuance, dividends, buybacks	Operating cash receipts	Capital structure decisions

Metric	Formula	Use
Free cash flow	CFO minus capital expenditures	Cash available after maintaining/growing asset base
FCFF	EBIT after tax plus D&A minus capex minus increase in working capital	Enterprise-level cash flow
FCFE	CFO minus capex plus net borrowing	Equity-level cash flow
Cash conversion	CFO divided by net income	Earnings quality indicator
Capex intensity	Capex divided by revenue	Asset intensity and reinvestment needs

Ratio Analysis Quick Tables

Liquidity and Working Capital

Ratio	Formula	Higher usually means	Trap
Current ratio	Current assets divided by current liabilities	More short-term liquidity	Too high may signal inefficient asset use
Quick ratio	Cash plus marketable securities plus receivables divided by current liabilities	More immediate liquidity	Excludes inventory
Cash ratio	Cash plus marketable securities divided by current liabilities	Strongest liquidity measure	Too conservative for some industries
Working capital	Current assets minus current liabilities	Short-term operating cushion	Negative can be normal in high-turnover businesses
Days sales outstanding	Accounts receivable divided by average daily sales	Slower collection	Use credit sales if available
Days inventory outstanding	Inventory divided by average daily COGS	Slower inventory movement	Compare to industry norms
Days payable outstanding	Accounts payable divided by average daily COGS or purchases	Slower supplier payment	Rising DPO can temporarily boost CFO
Cash conversion cycle	DSO plus DIO minus DPO	Time cash is tied up in operations	Lower is generally better, but context matters

Profitability and Returns

\[ ROE = \frac{Net\ Income}{Sales} \times \frac{Sales}{Assets} \times \frac{Assets}{Equity} \]

Ratio	Formula	Interpretation
ROA	Net income divided by average assets	Profit per dollar of assets
ROE	Net income divided by average equity	Profit per dollar of equity
ROIC	NOPAT divided by invested capital	Return on capital used in operations
Gross margin	Gross profit divided by revenue	Pricing and production economics
Operating margin	EBIT divided by revenue	Operating efficiency
Net margin	Net income divided by revenue	After-tax profitability
Asset turnover	Revenue divided by average assets	Asset efficiency
Equity multiplier	Average assets divided by average equity	Financial leverage

DuPont logic: ROE can rise from better margins, faster asset turnover, or more leverage. Higher ROE is not always better if driven mainly by excessive leverage.

Leverage, Solvency, and Coverage

Ratio	Formula	Higher means	Exam interpretation
Debt-to-equity	Total debt divided by shareholders’ equity	More leverage	Increases financial risk
Debt-to-capital	Debt divided by debt plus equity	More debt in capital structure	Useful for capital mix
Net debt	Debt minus cash and equivalents	Debt after cash offset	Used in enterprise-to-equity bridge
Net debt to EBITDA	Net debt divided by EBITDA	More leverage relative to cash earnings	Common credit metric
Interest coverage	EBIT divided by interest expense	Greater ability to pay interest	Lower ratio signals distress risk
Fixed charge coverage	Earnings available for fixed charges divided by fixed charges	Broader coverage measure	Includes lease-like or fixed obligations if specified

Market and Valuation Multiples

Multiple	Formula	Best for	Key consistency rule
P/E	Price per share divided by EPS	Profitable equity valuation	Equity value over equity earnings
PEG	P/E divided by earnings growth rate	Growth-adjusted P/E comparison	Growth rate units must match convention
P/B	Price per share divided by book value per share	Financials, asset-heavy firms	Book value must be meaningful
P/S	Price per share divided by sales per share	Low-margin or early-stage companies	Ignores profitability
EV/EBITDA	Enterprise value divided by EBITDA	Capital-structure-neutral comparison	Enterprise value over pre-interest metric
EV/EBIT	Enterprise value divided by EBIT	More depreciation-aware than EBITDA	Useful when D&A differences matter
EV/Sales	Enterprise value divided by revenue	Unprofitable companies	Must evaluate margin potential
Dividend yield	Annual dividend divided by price	Income-oriented stocks	High yield may signal dividend risk

Valuation Decision Guide

Situation	Prefer	Why
Stable, mature dividend payer	Dividend discount model	Dividends may approximate distributable value
Company has predictable operating cash flows	DCF using FCFF	Captures full enterprise value
Leverage is changing materially	FCFF rather than FCFE	Avoids unstable equity cash flows
Bank or insurer	P/B, ROE, dividend methods	Debt-like liabilities are operating in nature
Early-stage growth company	EV/Sales, scenario DCF	Earnings may be negative or unrepresentative
Cyclical company	Mid-cycle earnings or normalized multiple	Peak earnings can make P/E look artificially low
Company with distinct divisions	Sum-of-the-parts	Different segments deserve different multiples
Distressed issuer	Liquidation, recovery, credit analysis	Going-concern assumptions may be unreliable
Acquisition analysis	Transaction multiples, accretion/dilution, synergies	Control premium and synergies matter

DCF Build Checklist

Forecast revenue drivers: price, volume, units, subscribers, utilization, market share.
Forecast margins: gross margin, SG&A, R&D, operating leverage.
Estimate taxes: use sustainable cash tax assumptions where appropriate.
Model reinvestment: working capital, capex, depreciation, amortization.
Calculate FCF: distinguish FCFF from FCFE.
Select discount rate: WACC for FCFF, cost of equity for FCFE.
Estimate terminal value: Gordon growth or exit multiple.
Bridge to equity value: subtract net debt and other senior claims.
Divide by diluted shares: use appropriate share count.
Sensitivity test: discount rate, terminal growth, margins, revenue growth.

Terminal Value Traps

Trap	Correct approach
Terminal growth exceeds long-term economy indefinitely	Use a sustainable long-run growth assumption
Mixing exit multiple and Gordon growth without reconciliation	Cross-check implied multiple and growth assumptions
Discounting terminal value incorrectly	Discount terminal value back to present value
Using EBITDA multiple on equity value	EV/EBITDA produces enterprise value
Forgetting net debt	Enterprise value is not equity value

Accounting and Quality of Earnings

Issue	Effect on statements	Research analyst focus
Capitalizing vs expensing	Capitalizing raises current earnings and assets	Compare policies and future amortization/depreciation burden
Depreciation method	Accelerated methods lower early earnings	Cash flow unaffected except tax effects
FIFO vs LIFO	In rising prices, FIFO gives higher inventory and lower COGS than LIFO	Compare margins and inventory values carefully
Inventory write-down	Reduces inventory and earnings	May indicate obsolete or overvalued inventory
Goodwill impairment	Reduces earnings and equity	Noncash but signals acquisition underperformance
Stock-based compensation	Noncash expense, dilutive potential	Add-back debates require dilution analysis
Restructuring charges	May be nonrecurring but can recur often	Normalize only if genuinely unusual
Revenue recognition	Timing affects revenue and earnings	Watch bill-and-hold, channel stuffing, deferred revenue
Deferred revenue	Cash received before revenue recognized	Liability that may support future revenue
Deferred tax asset	Future tax benefit	Depends on future taxable income
Deferred tax liability	Future tax obligation	Often arises from timing differences

Earnings Quality Red Flags

Red flag	Why it matters
Net income growing faster than CFO	Earnings may be accrual-driven
Receivables growing faster than revenue	Potential collection or recognition issue
Inventory growing faster than sales	Potential demand weakness or obsolescence
Frequent “one-time” charges	Normalization may be too aggressive
Margin expansion without clear driver	Could reflect accounting, mix, or cost timing
Large related-party transactions	May not reflect arm’s-length economics
Heavy reliance on adjusted EBITDA	May exclude real recurring costs
Rising leverage with flat earnings	Higher solvency and refinancing risk

Equity Security Analysis

Concept	Key idea	Exam use
Common stock	Residual ownership claim	Highest upside and residual risk
Preferred stock	Hybrid claim with stated dividend preference	Often valued like income security
Convertible security	Debt or preferred with equity conversion feature	Value depends on straight value plus conversion value
Rights and warrants	Options to buy shares	Potential dilution
ADR	U.S.-traded receipt for foreign shares	Adds FX, country, and accounting-comparison issues
Treasury stock	Repurchased shares	Reduces shares outstanding and equity
Dilution	Lower ownership or EPS from new shares	Analyze options, convertibles, warrants, issuance

Scenario	Correct analytical treatment
Share repurchase	Reduces shares; may increase EPS even without operating improvement
Option exercise	Adds shares and potential cash proceeds under treasury stock logic
Convertible debt	If dilutive, add back after-tax interest and add conversion shares
Preferred conversion	If dilutive, add back preferred dividends and add conversion shares
Loss-making company	Potential shares may be anti-dilutive
Buyback funded with debt	EPS may rise while leverage and interest expense increase

Fixed Income and Credit Reference

Concept	Meaning	High-yield point
Coupon rate	Stated interest rate on bond par value	Not the same as yield if price differs from par
Current yield	Annual coupon divided by market price	Ignores maturity and reinvestment
Yield to maturity	Discount rate equating price to promised cash flows	Assumes held to maturity and payments made
Yield to call	Yield assuming bond is called on call date	Relevant when bond trades above par and is callable
Duration	Approximate price sensitivity to yield changes	Longer duration means greater rate sensitivity
Modified duration	Percent price change for a yield change	Price change is inverse to yield change
Convexity	Curvature of price-yield relationship	More important for large yield changes
Credit spread	Yield over benchmark	Compensation for credit, liquidity, and other risks
Seniority	Priority of claim	Senior secured debt has higher claim than subordinated debt
Covenant	Contractual protection for lenders	Weak covenants increase creditor risk

Rate or credit event	Typical bond price impact
Interest rates rise	Bond prices fall
Interest rates fall	Bond prices rise
Credit spread widens	Risky bond prices fall
Credit spread narrows	Risky bond prices rise
Duration increases	Greater price sensitivity
Call likelihood increases	Upside price may be capped near call price
Credit rating deteriorates	Spread usually widens and price falls

Economics, Industry, and Company Analysis

Macro Indicator Effects

Factor	Increase usually benefits	Increase usually hurts
Interest rates	Banks’ asset yields may improve if deposit costs lag	Long-duration equities, housing, highly leveraged firms
Inflation	Commodity producers with pricing power	Fixed-margin firms, consumers, long-duration bonds
Strong domestic currency	Importers, foreign-cost companies	Exporters, foreign earnings translation
Weak domestic currency	Exporters, domestic producers competing with imports	Importers, companies with foreign-currency debt
Oil prices	Energy producers, oilfield services	Airlines, transport, chemicals if unable to pass through
Economic growth	Cyclicals, industrials, consumer discretionary	Defensive sectors may lag relatively
Recession risk	Staples, utilities, high-quality bonds	Cyclicals, high-yield credit, leveraged companies

Industry Structure Checklist

Factor	Question to ask	Analyst implication
Barriers to entry	Can new competitors enter easily?	High barriers support margins
Supplier power	Can suppliers raise input costs?	High supplier power compresses margins
Buyer power	Can customers demand lower prices?	High buyer power limits pricing
Substitutes	Are alternatives available?	Substitutes cap growth and margin
Rivalry	Is competition price-based?	Intense rivalry reduces returns
Regulation	Are prices, returns, or operations constrained?	Affects growth, margins, and risk
Technology change	Can products become obsolete quickly?	Shortens forecast visibility
Operating leverage	Are fixed costs high?	Earnings more sensitive to revenue changes

Sector Sensitivity Reference

Sector type	Typical characteristics	Analytical focus
Cyclical	Earnings tied to economic cycle	Normalize margins and earnings
Defensive	Demand stable across cycles	Dividend sustainability and valuation premium
Financial	Leverage is core to business model	Credit quality, capital, net interest margin
Commodity-linked	Revenue tied to commodity price	Cost curve, reserve life, hedge position
Technology/growth	High reinvestment and scalability	TAM, retention, unit economics, dilution
Utilities	Regulated returns and high debt	Rate base, allowed return, interest rate sensitivity
Real estate	Asset values and financing costs matter	NOI, cap rates, occupancy, leverage

Quantitative Methods

Descriptive Statistics

Measure	Meaning	Use
Mean	Arithmetic average	Sensitive to outliers
Median	Middle observation	Better for skewed data
Mode	Most frequent observation	Useful for categorical or clustered data
Variance	Average squared deviation from mean	Dispersion measure
Standard deviation	Square root of variance	Volatility measure
Coefficient of variation	Standard deviation divided by mean	Risk per unit of return
Skewness	Asymmetry of distribution	Negative skew implies larger downside tail
Kurtosis	Tail heaviness	High kurtosis means more extreme outcomes

Probability and Normal Distribution

Concept	Practical meaning	Trap
Expected value	Probability-weighted average outcome	Not necessarily the most likely outcome
Standard deviation	Dispersion around expected value	Does not show direction
Confidence interval	Range estimate around sample statistic	Wider with higher confidence or more volatility
Standard error	Standard deviation of sampling distribution	Falls as sample size rises
Normal distribution	Symmetric bell-shaped distribution	Real returns may have fat tails
Z-score	Number of standard deviations from mean	Requires comparable distribution assumptions

Correlation, Regression, and Risk

Term	Meaning	Exam trap
Correlation	Strength and direction of linear relationship	Does not prove causation
Correlation of +1	Perfect positive linear relationship	No diversification benefit
Correlation of 0	No linear relationship	Nonlinear relationship may still exist
Correlation of -1	Perfect negative linear relationship	Maximum diversification potential
Regression beta	Slope coefficient	Measures sensitivity to independent variable
Alpha	Intercept or excess return unexplained by beta	Must consider statistical significance
R-squared	Percent of variation explained by model	High R-squared does not prove correct model
P-value	Probability of observing result if null is true	Lower p-value indicates stronger evidence against null
Multicollinearity	Independent variables correlated with each other	Coefficients may be unstable
Heteroskedasticity	Nonconstant error variance	Standard errors may be unreliable

Research Modeling and Forecasting

Forecast item	Common driver	Reasonableness checks
Revenue	Units, price, market growth, share, churn	Compare to industry growth and capacity
Gross margin	Mix, input costs, scale, pricing	Compare to history and peers
SG&A	Fixed vs variable cost behavior	Check operating leverage assumptions
R&D	Product pipeline and innovation needs	Cutting R&D may boost short-term EPS but hurt growth
Depreciation	Prior capex and asset lives	Should relate to PP&E and capex
Capex	Maintenance plus growth investment	Compare capex to depreciation and revenue growth
Working capital	Receivables, inventory, payables days	Avoid unrealistic perpetual working capital benefits
Interest expense	Debt balance and rate	Reflect refinancings and floating-rate exposure
Tax rate	Jurisdiction mix and tax attributes	Distinguish statutory, effective, and cash taxes
Share count	Issuance, buybacks, dilution	Use diluted shares for per-share valuation

Scenario and Sensitivity Use

Tool	What it changes	Best use
Sensitivity table	One or two variables	Show valuation impact of key assumptions
Scenario analysis	Multiple linked assumptions	Bull/base/bear operating cases
Break-even analysis	Level needed for target outcome	Margin, volume, or price threshold
Stress test	Severe adverse assumptions	Downside risk and balance sheet resilience
Monte Carlo concept	Probability distributions across inputs	Range of outcomes when many variables interact

Common Series 86 Calculation Traps

Trap	Avoid it by
Mixing enterprise and equity values	Use EV with pre-interest metrics; use equity value with net income or EPS
Using book debt when market value is required	Read the question carefully; market weights are preferred for WACC when provided
Forgetting tax shield on debt	Use after-tax cost of debt in WACC
Discounting nominal cash flows at real rates	Match nominal with nominal and real with real
Treating EBITDA as free cash flow	Subtract taxes, capex, and working capital needs
Applying P/E to negative earnings	Use another method or normalized earnings
Comparing companies with different fiscal years or accounting policies	Normalize before comparing
Ignoring nonrecurring items	Adjust only when truly unusual or nonoperating
Confusing yield and coupon	Coupon is stated; yield depends on price and expected cash flows
Interpreting high growth as high value automatically	Growth creates value only if returns exceed cost of capital

Fast Review: If the Question Says…

If the prompt emphasizes…	Think first about…
“Capital-structure neutral”	Enterprise value, EBIT, EBITDA, FCFF, WACC
“Value to common shareholders”	Equity value, EPS, P/E, FCFE, cost of equity
“Rising receivables faster than sales”	Revenue quality or collection risk
“High fixed costs”	Operating leverage and earnings sensitivity
“Callable bond trading above par”	Yield to call and capped upside
“Cyclical peak earnings”	Normalize earnings before valuing
“Stable dividends and mature firm”	Dividend discount model
“Negative EPS but strong revenue growth”	EV/Sales, DCF scenarios, unit economics
“Increasing DPO”	Temporary CFO boost from slower supplier payments
“Beta greater than 1”	More systematic risk than market
“Correlation less than 1”	Some diversification benefit
“Positive NPV”	Value creation if inputs are sound
“ROE up due to leverage”	Higher financial risk, not necessarily better operations

Final Preparation Checklist

Rework formula problems until you can identify the correct numerator, denominator, and valuation level without hesitation.
Practice translating financial statement changes into ratio, cash flow, and valuation effects.
Drill DCF, WACC, EPS, bond price/yield, duration, and regression interpretation questions.
For every valuation question, ask: cash flow or earnings, enterprise or equity, normalized or reported, absolute or relative?
For every accounting question, ask: cash or accrual, recurring or nonrecurring, operating or financing?

Next step: use this Quick Reference as a checklist while completing timed Series 86 practice sets, then review every missed question by formula, statement linkage, valuation method, and assumption error.

Scenario Guide

Information and Data Collection