Financial Analyst Interview Question and Answer

1. Explain ‘financial modeling’.

Ans. Financial modeling is a quantitative analysis commonly used for either asset pricing or general corporate finance. It is the process wherein a company’s expenses and earnings are taken into consideration (commonly into spreadsheets) to anticipate the impact of today’s decisions in the future. 

The financial model also turns out to be a very impactful tool for the following tasks:

• Estimate the valuation of any business
• Compare competition
• Strategic planning
• Testing different scenarios
• Budget planning and allocation
• Measure the impacts of any changes in economic policies 

Since financial modeling is one of the most primary key skills, you can also share your experience about using different financial models including the discounted cash flow (DCF) model, initial public offering (IPO) model, leveraged buyout (LBO) model, consolidation model, etc. 

2. Walk me through a ‘cash flow statement.’

Ans. Being one of the essential financial statements, you’ll have to be well-prepared for this question as day in and day out you have to use cash flow statements to successfully build a three model statement. 

When a recruiter asks this question during your interview, you can start by explaining the three main categories of cash flow statement:

• Operating activities
• Investing activities 
• Financing activities

After calculating the total cash from all the above-listed categories, adding an opening cash balance, and further explaining all significant adjustments, you will arrive at the total change in cash. Mention all the necessary parts that are associated with it.

However, during the interview, the interviewer will also be looking out for something more beyond the bookish knowledge about cash flow statements. S/He must be interested in how the statement of cash flow is useful to a financial analyst.

Now, this could turn into your bonus point as you can walk through the intent of using the cash flow statement, which is listed below:

• Provides data and information about a firm’s liquidity status, 
• Helps in outlining the firm’s ability to alter cash flows status in future
• Highlights the changes in account balances on the balance sheet
• Helps in depicting the company’s ability to meet expansion requirements in future
• Gives the estimation of available free cash flow

3. Is it possible for a company to have a positive cash flow but still be in serious financial trouble?

Ans. To answer this Financial Analyst interview question you can say:

Yes. There are two examples –

1. A company that is selling off inventory but delaying payables will show positive cash flow for a while even though it is in trouble
2. A company has strong revenues for the period, but future forecasts show that revenues will decline

When you define such situations, it proves that you are not looking at the cash flow statements; instead, you care about where the cash is coming from or going to and mark all the points highlighting how the company is making or losing money.

4. What do you think is the best evaluation metric for analyzing a company’s stock?

Ans. There is no specific metric. It depends on how you put the answer and make the interviewers understand the value of the specific parameter that you mention.

The main intention of this question is to check your critical thinking abilities and logical skills. This question also gives you a chance to prove your capabilities of identifying potential pros and cons related to the available investment options.  

Generally, technical analysts use some of the following types of charts to check the stock price, which forms the basics of picking the right one:

• Line charts (helps in tracking daily movements)
• Bar charts (helps in tracking periodic highs and lows of stock price)
• Point chart (helps in determining stock momentums)

5. What is ‘working capital, and which are the different types of working capital’?

Ans. The working capital formula is best defined as current assets minus current liabilities. 

The primary function of working capital is to analyze the total amount of money that you have readily available to meet the demand of all the current expenses. 

Since financial analysts play a major role in being an information mediator in capital markets, getting a true understanding of working capital needs is very essential. Also, an analyst must stay on toes to forecast the actual working capital requirements, especially in the case when the company is constantly growing or expanding. 

Also, you can highlight a few prior incidents when your existing company felt the need for additional working capital, and you can even back your answer with the ways you used to boost the working capital. 

Another example of proving your abilities is to suggest the times when you and your team used the working capital data to operate current and future needs smoothly.

6. Explain quarterly forecasting and expense models.

Ans. The analysis of expenses and revenue which is predicted to be produced or incurred in the future is called quarterly forecasting. 

For this, referring to an income statement along with a complete financial model works well. However, making a realistic model is a challenge, and thus the role of a financial analyst comes here. As an expert, you need to model revenues with high degrees of detail and precision. 

An expense model tells what expense categories are allowed on a particular type of work order, which forms the foundation of building a budget. Also, to make this model functional, an expense projection model is created, which helps in identifying variable and fixed costs which forms a basis of accurately forecasting the company’s expected profit or loss.

7. What is the difference between a journal and a ledger?

Ans. The journal is a book where all the financial transactions are recorded for the first time. The ledger is one that has particular accounts taken from the original journal. So in layman’s terms, journals are the raw books that play a pivotal role in preparing the ledger. This gives us a second conclusion that if you wrongly prepare a journal, your ledger will also be faulty.

However, here the question which the recruiter will ask during the financial analyst interview is to understand your foundational knowledge as this, directly or indirectly relates to the Financial Analyst job role, which is mentioned below:

• Reviewing journal entries (to ensure the data is correct)
• Checking the distribution work area to manage journal entries for ledgers
• Ensuring that all accounting standards are met
• Verifying set of subsidiaries or management segment values
• Managing sub-ledger source transaction
• Recurring general ledger journal entries
• Reviewing financial statements and other transactions

8. Mention one difference between a P&L statement and a balance sheet?

Ans. The balance sheet summarises the financial position of a company for a specific point in time. The P&L (profit and loss) statement shows revenues and expenses during a set period.

9. What is ‘cost accountancy’?

Ans. This is an important and most commonly asked financial analyst interview question. It is asked by employers to check if the candidate has some basic understanding of cost accounting. 

Cost accountancy is the application of costing and cost accounting principles, methods, and techniques to the science, art, and practice of cost control and the ascertainment of profitability as well as the presentation of information for managerial decision making.

10. What is NPV? Where is it used?

Ans. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.

11. How many financial statements are there? Name them

Ans. There are four main financial statements – 

1. Balance sheets
2. Income statements 
3. Cash flow statement
4. Statements of shareholders’ equity

12. What are ‘adjustment entries’?

Ans. Adjustment entries are accounting journal entries that convert a company’s accounting records to the accrual basis of accounting.

13. Do you follow the stock market? Which stocks in particular?

Ans. You need to be very careful in answering this question. As a financial analyst, following the stock market proves to be beneficial. Also, always be up-to-date with the stocks.

15. What is a ‘composite cost of capital’?

Ans. Also known as the weighted average cost of capital (WACC), a composite cost of capital is a company’s cost to borrow money given the proportional amounts of each type of debt and equity a company has taken on.

WACC= Wd (cost of debt) + Ws (cost of stock/RE) + Wp (cost of pf. Stock)

16. What is ‘capital structure’?

Ans. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

17. What is ‘goodwill’?

Ans. Goodwill is an asset that captures excess of the purchase price over the fair market value of an acquired business.

18. What do you know about valuation techniques?

Ans. For calculating the valuation of a business or stocks, generally, the following three types of valuation techniques are used:

• DCF analysis – helps in forecasting future cash flows
• Comparable company analysis – helps in comparing the current worth of one business when compared to other similar businesses using P/E, EBITDA
• Precedent transactions – helps in identifying the transactional values of a company by comparing a business with other business which has been sold recently

19. What do you mean by ratio analysis?

Ans. The ratio analysis approach is frequently used by the financial analyst to get deeper insights into a company’s overall equity analysis by using financial statements.

Analysis of different ratios helps stakeholders in measuring a company’s profitability, liquidity, operational efficiency, and solvency status. And when these ratios are paired with other essential financial metrics, it results in a deeper view of the financial health of the company. 

Analyzing ratios help in:

• Examining the current performance of your company with past performance
• Avoiding potential financial risks and problems 
• Comparing your organization with other 
• Making stronger and data-driven decisions

Some of the most frequently analyzed financial ratios are:

• Liquidity ratios
• Solvency ratios
• Efficiency ratios
• P/E and dividend ratios

20. What do you think are the common elements of financial analysis?

Ans. Some of the common elements of financial analysis include:

• Revenue & revenue growth and income statement 
• Profits and net profit margin
• Accounts receivables and inventory turnovers
• Capital efficiency (Return on equity, debt to equity ratio)
• Firm’s liquidity

21. How is Cash Flow different from Free Cash Flow (FCF)?

Ans. Free cash flows (FCF) refers to the remaining cash available for investors after considering cash operating and investing expenditure and it is used to find a business’s current value. However, cash flow is used to find net cash inflow from the business’s basic activities like operating, investing, and financing. 

Free cash flow helps in defining business valuation which is required by investors as it includes capital expenditure and changes in Net Working Capital. 

22. As a financial analyst which factors do you constantly analyze?

Ans. It is essential to keep data handy for the following essential factors (depending on the business type, the metrics can change) 

• Risk exposure and how the business will affect the current working capital?
• How to streamline finance requirements and make business processes effective?
• Identifying the right opportunities based on capital and/or revenue.
• How will financial decisions affect key value drivers?
• Which product/ customer segment/ target audience largely affects profit margins and what will be the future impact on margins affected by today’s choices, financial strategies, and decisions?
• Which decisions can affect our stock price?

23. Which tools do you use for advanced financial modeling?

Ans. Some of the essential business intiliegence tool (BI tools) are:

• Quantrix
• Oracle BI
• GIDE
• Maplesoft 

24. What will you use to gauge the company’s liquidity – cash flow or income?

Ans. Measuring the firm’s liquidity means finding the company’s ability to pay its current debt with its current assets. Here is a basic process to measure the company’s liquidity:

• Calculate the current ratio of the company (Current Assets/Current Liabilities)
• Calculate the quick ratio (Current Assets-Inventory/Current Liabilities)
• Find the Net Working Capital of the company (Current Assets – Current Liabilities)

However, if you choose between cash flow or income, the better idea is to gauge the company’s liquidity based on cash flow, since using earning is a more reliable approach. 

25. Which programs do you use to prepare illustrated technical graphs, charts, or spreadsheets?

Ans. To answer this question, try not to stick to just one specific program. You can mention the different software programs that you have used in the preparation of reports. The best way to answer this question is to tell the usage of one program over the other. You can say that you prefer Microsoft excel as it offers statistical and analytical references.

Also, irrespective of how many programs you have used before, showcase that are willing to use any program that the organization opts for.

26. What is variance analysis?

Ans. Variance analysis is the quantitative analysis of the difference between planned and actual numbers. The sum of all variances depicts the overall over-performance or under-performance for a particular reporting period. Companies assess the favorability for each item by comparing actual costs to standard costs in the industry.

27. When do you capitalize rather than expense a purchase?

Ans. When you capitalize a purchase, you are converting the purchase to an asset on the balance sheet. The more costs that are capitalized rather than expensed, the greater the profit that can be reported to shareholders. If the purchase will be used in the business for over one year, it will be capitalized and depreciated according to the company’s accounting policies. Capitalizing expenses is beneficial as companies acquiring new assets with long-term lifespans can amortize or depreciate the costs.

28. What is important to consider when deciding on capital investment?

Ans. Before investing, you should first consider these factors:

• The outlook of the management
• The strategy of the competitor
• Opportunities that are created by technological changes
• Cash flow budget
• Fiscal Incentives
• Market Forecast
• Other non-economic factors

29. What is EBITDA? What is left out of it?

Ans. By asking this question, the recruiter wants to see what in-depth industry knowledge you have about EBITDA. You can frame your answer using the following: 

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is a measure of a company’s overall financial performance. EBITDA can be misleading because it does not include the cost of capital investments like property, equity, plant, and equipment.

EBITDA Formula and Calculation:

The two EBITDA formulas are:

#Method 1:

EBITDA=Net Income+Interest+Taxes+D+A

where:

D=Depreciation

A=Amortization   

#Method 2:

EBITDA=Operating Profit+DE+AE

where:

DE=Depreciation expense

AE=Amortization expense

30. What are the types of financial analysis? Explain at least three.

Ans. This is a question for those intermediate in the field. 

Liquidity Analysis is one of the many types. It utilises the company’s balance sheet to gauge whether it can fulfil short-term obligations. This is done through the use of different methods including:

• Current Ratio ( Current Ratio = Current Assets/ Current Liabilities)
• Acid Test
• Net Working Capital

Leverage Analysis is used for evaluating a business’s performance. This is commonly done through finding the debt/equity ratio, DuPont analysis model, etc. 

Vertical Analysis refers to checking the different components of a company’s income statement. Each of these components is then divided by the business’s revenue. Using the result, an enterprise should compare with other businesses in its related industry. 

31.What are the advantages of raising debt over equity?

Ans. You should ideally highlight how synchronous debt and equity are. Do mention:

• Raising debt does not affect the stake of the current owner’s ownership. 
• Debt helps in offering tax benefits to a business. 
• Businesses with sticky revenue can enjoy higher profits even with a minor debt. 
• Debt is cheaper than equity. 

32. Should you increase the consumer base by 1% or price by 1%?

Ans. You should tactfully respond to this question. Do mention that the decision primarily depends on demand and supply. As it is important to retain and increase customers, keeping the price the same will generate more profit. By increasing price, a business may lose customers.

33. Give one reason why you should analyse long-term liability. 

Ans. Debts greater than a year refer to long-term liability. By analysing it, a company can know its financial strength.

34. Why is the asset turnover ratio calculated?

Ans. When you are answering this question, do support your reasoning with a few examples. 

It measures a business’s efficiency by calculating how it uses its assets to drive sales. If the ratio is lower, it directly corresponds to the requirement of making it higher. 

35.What are the components of the DuPont model and how are they calculated?

Ans. Asset turnover ratio, financial leverage, and net profit margin are the main aspects of the DuPont model. With these, a company’s return on equity (ROE) is evaluated. 

• Net Profit Margin is calculated with the following steps:

         Profit Margin = Net Income /Revenue

• The formula for calculating the Asset Turnover Ratio is:

         Asset Turnover Ratio = Net Sales (or Revenue) / Average Assets

• Financial Leverage is calculated by:

        Financial leverage = Average Assets / Average Equity

36. Why are dividends not a part of income statements?

Ans. Dividends are not operating expenses and do not affect the net income of a company. 

You can further elaborate that a cash dividend is paid to the shareholder by a business.

37. What are data formats in Excel? Mention 3 common ones.

Ans. It is essential to know the basic data formats in Microsoft Excel, as they are used for creating financial models. Some of the common data formats are:

• Strings: These constitute a text-type format comprising letters, numbers and even punctuations. 
• Numbers: These are numerical values that are formatted by separating commas and using decimal places. 
• Currencies: These comprise a monetary format that is made available in different currencies. 

38. How can negative working capital help a business?

Ans. When an enterprise has a low inventory, it can boost its sales growth through negative working capital. In other words, a business can generate money by selling products to the customer before paying the bills to the supplier.

39. Explain the syntax of 2 lookup functions.

Ans. Here the interviewer wants to know how proficient you are with the advanced levels of Microsoft Excel. 

You can start by mentioning how lookup functions help one find an appropriate match, be it, in a row or column. 

VLOOKUP is short for vertical lookup. With it, you can search for a particular value in a column. Then, a different value is returned from the same row of that specific value. 

The syntax for it is

=VLOOKUP(lookup_value, table_array, col_index_num, [range_lookup])

The second common lookup function is HLOOKUP or horizontal lookup. It looks for a value in a row and then returns another value from the same column of that particular value. 

The syntax for it is

=HLOOKUP(lookup_value, table_array, row_index_num, [range_lookup])

40. Mention any financial reporting software you have used before. 

Ans. Here the interviewer wants to know whether you are aware of any financial reporting software that can make statements error-free. Such type of software helps a company analyse its financial strength and keep a check on the KPIs.  

QuickBooks Online is a popular tool among financial analysts. If you have used it, you can mention how you generate reports. Mention the following

1. Creating the summary of the organisation. 
2. Sum up the investments. 
3. Cite the sources
4. Find out the organisation’s valuation
5. Add risk factors and detailed results. 

You may also have used other financial reporting software including FinAlyzer, Oracle Essbase or FactSet. Do give an overview of them while answering this financial analyst interview question. 

41. Mention the differences between NPV and IRR if you think there are any. 

Ans. First of all, both are discounted cash flow methods to assess a company’s investments. IRR stands for Internal Rate of Return and it is used to determine the profitability of future investments using a percentage value, while NPV calculates using a dollar value. 

42. What do you understand by financial benchmarking?

Ans. Benchmarking is the process to compare a company’s performance to other businesses. Financial benchmarking is done by running a financial analysis that helps in evaluating the efficiency in a company’s expenses. 

43. Can you tell us how assets and liabilities affect a company’s cash flow?

Ans. There are few aspects of how a cash flow of an organisation can be affected:

1. Change in accounts receivable
2. Change in inventory 
3. Change with prepaid expenses
4. Depreciation factor
5. Change in operating liabilities

44. Why would you need to calculate depreciation?

Ans. Depreciation is a positive cash flow factor. It helps in reducing the book value of fixed assets a company has. 

45. If there is an increase in accounts receivable what will happen to the cash flow?

Ans.  An increase in accounts receivable decreases cash flow. This means that customers are yet to pay for a product, usually when they purchase on credit. Cash flow will only increase when the company will collect the money. 

46. Walk us through an investment declaration that you will show to your senior management.

Ans. Try to avoid talking about software when you are answering this interview question. Focus on elaborating your thinking process here. 

You can mention that you first try to understand the intent of an investment decision. Then you would collate income statements, cash flow statements and balance sheets. After collecting financial information, you would ask senior management if there is any change required from business partners. At the end, you may also want to suggest other investment options.