Financial Analyst Interview Questions stated below is a boon for the individual going to face a business interview. We have gathered all the important points and questions asked in a financial interview by discussing with many interviewers and our experienced panel.
Just go through the financial analyst interview questions before attending an interview to know all the answers to your interview questions and come out with flying colors.
Top 21 Financial Analyst Interview Questions & Answers
1. What are the financial statements and what do they tell you about a company?
The most basic financial Analyst interview questions is regarding financial statements. Financial statements are the quantitative representation of the financial performance and financial position of a company. The chief financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement. Income Statement and Cash Flow Statements are flowed statements i.e., for a particular period (month, quarter, year) while the Balance Sheet is a stock statement i.e., as on a specific date.
Studying financial statements would provide the user with useful information about the company’s operations, efficiency, profitability, financing, etc. Financial Statements are used by the management, shareholders, debt holders, creditors, tax personnel, etc.
2. Walk me through the creation of a financial model from scratch.
Aspire to become a financial analyst? You should know the procedure of creating a financial model at the tip of your tongue when asked in a financial Analyst interview question. The first step is to achieve understanding and clarity about the objective of the financial model. For an equity research model, there are three phases to build a financial model:
- Populating Historical Data
- Forecasting Financial Performance
- Performing Valuation
You need to keep a few essential things in mind, as mentioned below, before creating a financial model. These key points will help you in building a model for conventional business modeling, management reporting, and even data analysis purposes.
- Figure out what you want your model to do – You need to plan first what you want the model to accomplish, and how it will display results. By doing this, you will get a fair idea in which assumptions and calculations need to be present, and it will help you in avoiding any unwanted or extra calculations.
- Keep things separated – Try to create your spreadsheet like a book, beginning with the assumptions entered into the model, moving towards the calculations, and concluding with the model results. This can help improve the usability of your model, particularly regarding areas such as data analytics or more conventional business modeling.
- Avoid hardcoding – Avoid inserting a constant number inside a formula as it not only makes your spreadsheet stubborn but also it creates confusion and can cause the model to return inappropriate results without the user being fully aware of the issue.
- Keep things simple – Keeping things simple also has the added benefit of reducing any further costs, and you may sustain when the time arrives to get a financial model audit.
- Keep things consistent – You can keep the structure steady to help the user navigate their way around the model and also to comfort them that the model has been built with planning, attention, and accuracy in mind.
3. What tools would you use to prepare illustrated reports with graphs, spreadsheets, or charts?
I want to use Microsoft Excel because it is a widely used and a user-friendly tool. Using MS Excel, you can easily create spreadsheets and prepare demonstrated technical reports and apply the advanced mathematical and analytical functions the software offers. But I would also like to work with other Business Intelligence softwares like Power BI, Tableau, and Qlik to create interactive dashboards if needed for my job.
4. Why would a company’s quick ratio be lower than its current ratio?
This is the most favorite question of the interviewers in financial analyst interview questions. The quick ratio offers a more conservative view of a company’s ability to meet its short-term liabilities with its short-term assets because it doesn’t include inventory and other current assets that are more difficult to turn into cash. Apart from inventory, and other less liquid assets, the quick ratio focuses on the company’s more liquid assets.
Both quick ratio and current ratio include accounts receivable, but some receivables might not be able to be liquidated very quickly. As a result, even the quick ratio may not give an accurate representation of liquidity if the receivables are not easily collected and converted to cash.
5. Tell me two advantages of raising debt over equity.
One should know these advantages before facing financial Analyst interview questions.
- Raising debts does not result in the dilution of ownership
- Interest on debt is a tax-deductible expense
- Provided the company can generate steady performance, debt will amply return to the equity shareholders. Leverage will enhance RoE.
6. A company buys a fixed asset using the company’s cash; walk me through the impact on the financial statements on the purchase date.
Balance Sheet: On the asset side, the amount of cash will go down, and the number of fixed assets will go up
Cash Flow Statement: To show the purchase, there will be an outflow under the heading of cash flow from investing activities
7. What is the difference between Futures Contract and Forward Contract?
Futures contract and a forward contract is always asked in a Financial Analyst Interview Questions.
- Futures contracts are standardized contracts; forward contracts are customized contracts
- Futures contracts are regulated; forward contracts are not regulated
- Futures contracts are traded on an exchange; forward contracts are traded on an OTC market
- Futures contract have low counterparty risk; forward contracts have high counterparty risk
- A futures contract is easy to terminate; the forward contract cannot be quickly terminated
8. What are the different methods to value a company?
- Absolute Valuation tools (DCF, DDM, RI)
- Relative Valuation Multiple (P/E, P/B, EV/EBITDA)
- Precedent Transaction Multiples (EV/EBITDA, EV/Sales, EV/Users)
9. What is DCF?
DCF meaning is always asked in a Financial Analyst. Discounted Cash Flow (DCF) is an absolute valuation method used to determine the value of an investment/project/company based on its future cash flows. DCF analysis efforts to find out the value of a company today, depending on predictions of how much cash flow it will generate in the future. These future cash flows are discounted to today using an appropriate discount rate that reflects the expected return, risk, opportunity cost.
10. How do you calculate Terminal Value?
There are three ways to calculate the terminal value:
1. Perpetuity Growth Method
Perpetual Growth Method is called the Gordon Growth Perpetual Model. This is the most preferred method. In this method, the assumption is made that the growth of the company will continue, and return on capital will be more than the cost of capital.
Terminal Value Formula = FCFFTerminal Year * (1+g) / (1 + WACC)^Terminal Year
This method is used for the companies which are mature in the market and have stable growth. Ex: FMCG companies, Automobile companies.
2. Exit Multiple Method
Exit Multiple Method is used with assumptions that market multiple bases to value a business. The projected statistic is the relevant statistic projected in the terminal year. EV/EBITDA multiple is a popular choice to calculate the terminal value for profit-generating companies.
Terminal Value = Multiple * Projected Statistic
3. No Growth Perpetuity Model
No growth perpetuity formula is made for an industry where there is a lot of competition, and the chance to earn excess returns tends to move to zero. In this formula, the assumption is the growth rate is equal to zero; this means that the return on investment will be equal to the cost.
Terminal Value Formula = FCFFTerminal Year / WACC
11. Which are the most common multiples used in relative valuation?
This is the most common question asked in Financial Analyst Interview Questions. There are two main types of valuation multiples:
- Equity Multiples
- Enterprise Value Multiples
1. Equity Multiples
Investment decisions take advantage of equity multiples, particularly when an investor seeks minority positions in corporations. Few common equity multiples used in valuation analyses are:
- P/E Ratio – The most commonly used equity multiple; needed data is easily accessible; computed as the proportion of Share Price to Earnings Per Share (EPS)
- Price/Book Ratio – Useful if assets primarily drive earnings; computed as the proportion of Share Price to Book Value Per Share
- Dividend Yield – Used for evaluations between cash returns and investment types
- Price/Sales – Used for companies that make losses and also used for making quick estimations
Nevertheless, a financial analyst must take into consideration that businesses have to change levels of debt that eventually have an impact on equity multiples.
2. Enterprise Value Multiples
Enterprise Value represents the entire firm i.e., equity holders and debt holders. Hence it essential to note that the price-performance in the denominator has not factored in the payments to equity or debt.
- EV/Revenue – Slightly affected by differences in accounting, computed as the proportion of Enterprise Value to Sales or Revenue.
- EV/EBITDAR – Mostly used in industries in the hotel and transport sectors; computed as the proportion of Enterprise Value to Earnings before Interest, Tax, Depreciation & Amortization, and Rental Costs
- EV/EBITDA – EBITDA can be used as a substitute of free cash flows; most used enterprise value multiple; computed as the proportion of Enterprise Value to Enterprise Value / Earnings before Interest, Tax, Depreciation & Amortization
- EV/Invested Capital – Used for capital-intensive industries; computed as the proportion of Enterprise Value to Invested Capital
12. Between NPV and IRR, which is better?
NPV is a more popular choice for estimating mutually exclusive projects than the IRR method. This is because the NPV method has more accurate reinvestment rate assumptions. Along with that, it is an improved indicator of profitability and investor wealth and statistically will return the correct accept-or-reject decision irrespective of whether the project experiences non-normal cash flows or if differences in project size or timing of cash flows happen. In cases when the cash flows are normal, IRR can be used as a supplementary tool with NPV.
13. Can the cost of equity be lower than the cost of debt?
Financial Analyst Interview Questions The interviewer loves to ask this question. The cost of equity can never be lower than the cost of debt. The reasons are as follows-
- Debt is a contractual obligation between a company and its creditors. The contract outlines the repayment of borrowed money, typically with interest or fees to the creditors in payment for the use of that capital. The legal agreement between creditor and firm always places the creditors’ repayment rights above those of any supplies to equity holders.
- Equity holders will never agree to a return on investment that is lower than debt holders as they are always secondary to debt holders and do not receive a prescribed obligation to be repaid their capital.
- Debt holders are primarily concerned about the repayment of their interest and principal portion. Equity holder bears the market risk, performance/operation risk, financial risk, etc. so they would right in asking for an expected return equal to the risk they face.
14. Which valuation tool would you use to value a bank?
Banks are mainly treasured using Price to Book Value multiple, Justified Price to Book Value multiple, Residual Income Method. This is because of the following reasons –
- Banks have assets and liabilities which are periodically marked to market, as it is mandatory under regulations. So, the Balance Sheet value represents the market value, unlike other industries where the Balance Sheet represents the historical cost of the assets/liabilities
- Bank assets include investments in government bonds, high-grade corporate bonds or municipal bonds, along with commercial, mortgage, or personal loans that are generally expected to be collectible
15. Do you follow the stock market? Which stocks in particular?
This answer changes from person to person. Before the interview, you must have a view on country/economy (GDP, Inflation, currency) and stock market index and two industries (eg. Telecom, Retail, Energy, BFSI, etc.
Another form of the answer:
I do not invest in stocks directly. I allocate capital to index funds (lower expense ratio and better tracking the market). At my age, I have a higher risk appetite and long investment horizon, hence most of my investments are in Small-cap and Midcap index funds as I believe that they have a higher chance of delivering impressive capital growth over the longer term.
16. Describe a situation when you had to meet a tight deadline. How did it turn out?
During my internship last summer, four hours before our final presentation to senior management, we discovered that one of our peers/teammates had come down with food poisoning the night before and would be unable to present. Granted, we’d all worked on the project together, but none of us had practiced her segment. We thought about asking to reschedule the presentation given the late notice, but we knew that the manager’s time was scarce, so we decided to adjust.
For reducing interruption, we all agreed to keep with our original presentation sections. Still, then we discussed as a group who might be comfortable with a more on the spot presentation for our sick teammate’s part. I was ready to come forward, and the presentation went smoothly without any problem.
17. Tell me about a time when you were working in a team and your opinion was challenged?
We were getting ready for our final group paper in our sports marketing class, and I suggested to the team that we should each present a part of the project to the class. Another teammate shared that he felt it would be more fluid if only one person present. I wasn’t sure why, and I felt pretty strongly that we should all be represented in the outcome, so I asked him for more information.
He pointed out that the presentation was only 10 minutes long, and to break it down into four presenters meant that we could easily lose up to a minute in transitions. I hadn’t considered that point, so I agreed with it, and we conceded, approving to proceed with two presenters, which would lessen changeovers but still ensure some variety in delivery.
18. How would you handle a very unhappy (and vocal) internal client during a business meeting?
My focus would be on the number of people attending the meeting. In 1:1, I would listen carefully to the concerns and try to find a real-time solution. If there were multiple attendees and the dissatisfaction is keeping the meeting from moving forward, I would ask to meet 1:1 at a later time to discuss further. I would also consider the argument with my manager to get his direction.
The answers to the following questions need to be built on your personality and experience. Use such questions to your advantage to educate the interviewer about yourself as a person, about your character, nature, commitment, work ethics, etc.
It is most important to refer to the above Financial Analyst Interview Questions before appearing for a financial analyst. Theses Financial Analyst Interview Questions will prepare you for all the topics asked in case you missed one.