Learn how Series 86 tests adjusted figures, accounting choices, governance, corporate actions, and the ratios used to compare companies.
Series 86 does not assume that reported numbers can be accepted at face value. The outline emphasizes accounting practices, methodology differences, adjusted financial information, accounting-rule changes, and the difference between GAAP-adjusted figures and underlying economics because research analysts must decide whether the reported story is actually comparable and reliable.
This is where ratio analysis becomes more than memorization. Margins, return on equity, return on assets, and return on invested capital only help when the analyst understands how accounting choices, one-time items, capital structure, and corporate actions affect them. A ratio can look strong for the wrong reason.
| Metric | Helpful question | Common Series 86 trap |
|---|---|---|
| gross, operating, or net margin | is the margin improvement structural or temporary? | treating one-time benefit as durable profitability |
| ROE | is the return driven by true operating strength or leverage? | assuming higher ROE always means better business quality |
| ROA | is asset productivity improving or are assets simply shrinking? | ignoring asset mix and write-down effects |
| ROIC | does the return exceed the cost of capital over time? | using the ratio without testing capital intensity |
Research reports often discuss adjusted EPS, adjusted EBITDA, normalized earnings, or other management-defined measures. Series 86 expects the analyst to ask whether those adjustments help explain economic reality or merely improve the optics. If recurring stock compensation, restructuring charges, acquisition costs, or impairment patterns are removed every year, the “adjusted” view may be less informative than the GAAP base.
The stronger exam answer usually does not reject adjustments automatically. It asks whether the adjustment is justified, comparable with peers, and consistent with the real economics of the business.
Mergers, acquisitions, restructuring, divestitures, and consolidations matter because they can change the peer set, capital structure, cost base, integration risk, and future earnings profile. An analyst who relies only on pre-transaction trends may reach the wrong conclusion. That is why the outline explicitly includes the impact of corporate actions on individual companies.
Corporate governance also appears here because proxy-statement detail, incentive structure, and board oversight can affect how much confidence the analyst should place in management’s reported story.
A company’s ROE improves sharply after a leveraged acquisition, but integration risk is rising and operating margins are flat. Which Series 86 conclusion is strongest?
A. The higher ROE proves the company is fundamentally stronger
B. ROE should be ignored completely after any acquisition
C. The ROE improvement may reflect leverage rather than better operating performance, so the analyst should reassess the quality of the gain
D. The acquisition has no effect on comparability because the company reports consolidated results
Answer: C. Series 86 expects the analyst to interpret ratios in context. Higher return measures may reflect financial structure rather than stronger operations.