11 Financial Analyst Interview Questions (and Answers!) was originally published on Forage.
Financial analyst interview questions are a mix of technical questions designed to test your hard skills and behavioral questions that help the employer know if you have the soft skills to fit in with the company culture. You’ll likely need to calculate or describe common finance formulas and explain how different analytical approaches apply to real-world situations. While a financial analyst interview can be daunting, study and preparation can help you ace it.
Technical Financial Analyst Interview Questions
Employers want to see that you have the technical skills to handle accounting, corporate finance, and valuation tasks. The interviewer is interested in learning how you approach problems and handle difficult tasks.
While these types of questions are common for entry- or junior-level positions, interviewers may expect more senior applicants to already know these things without asking.
1. How do you calculate…
Financial analysts rely on many different calculations and metrics to test how well a company or product is performing. Some common formulas or metrics you may need to calculate are:
How to Calculate Key MetricsProfit MarginsProfit margins determine how much a company makes per $1 of revenue. Analysts use several different profit margin formulas:
– Calculate gross profit margins by subtracting the cost of goods and services (COGS) from revenue or net sales
– Divide a company’s net profits by revenue to calculate net profit margins.
– Calculate operating profit margins by dividing operating profits by revenue. Net Present Value (NPV)Net present value determines the profitability of an investment, business, or project.
To calculate NPV, you perform a discounted cash flow (DCF) analysis and subtract the cost of the initial investment from the sum of the investment’s discounted cash flows. Net Working Capital (NWC)Net working capital shows a company’s ability to cover short-term liabilities.
You calculate NWC by subtracting a company’s current liabilities from its current assets. Weighted Average Cost of Capital (WACC)A company’s weighted average cost of capital is how much it needs to pay to finance operations and stay open.
Calculating WACC involves determining what proportion of a company’s capital structure is equity and what proportion is debt and multiplying each ratio by the company’s respective costs of equity and debt.Internal Rate of Return (IRR)Internal rate of return measures the profitability of an investment while removing external factors like the economy at large.
To calculate a company’s IRR, you use the same formula as NPV, except you set the NPV to zero and solve for the discount rate.Contribution MarginContribution margins measure the profitability of a specific product.
You can calculate contribution margins in a few different ways:
– Subtracting total variable costs from total sales revenue – Subtracting per unit variable costs from per unit revenue- Adding net income to fixed costs Current RatioThe current ratio gives a snapshot of a company’s overall financial health at any given moment.
To calculate a current ratio, you divide a company’s current (or easy-to-liquify) assets by its current (or most pressing) liabilities. Quick RatioThe quick ratio shows a company’s ability to pay off current debts, giving a quick idea of a company’s overall solvency.
You can calculate a quick ratio by dividing a company’s liquid assets by current or due-within-a-year liabilities.Enterprise Value (EV)Enterprise value is a quick way to determine how much a company is worth. This metric only works for public companies.
You calculate EV by adding a company’s market capitalization and total debts and subtracting its liquid assets. Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA)EBITDA determines how much a company makes before variable and inevitable costs are expensed, like taxes and interest.
To calculate a company’s EBITDA, you add net income, interest, taxes, depreciation, and amortization. Price-to-Earnings (P/E) RatioThe P/E ratio determines profitability and can be used to compare potential investment options.
P/E is calculated by dividing a company’s cost per share by its earnings per share. You can do this historically (or trailing) by looking at the stock’s past 12 months or forward by analyzing the company’s forecasted earnings. Compound Annual Growth Rate (CAGR)Compound annual growth rate is how quickly an investment has grown between two points or years.
You calculate CAGR by dividing the investment’s value at the end of a given time period by its value at the beginning of the period. Then, raise it to the power of 1 divided by the number of years in the timeframe, and subtract one.
Knowing the formulas alone is often not enough — interviewers want to see that you know how, when, and why an analyst uses each metric.
You need to “not only understand these concepts but also apply them to current events or companies,” says Michael Dion, founder of F9 Finance and senior finance manager at a Fortune 100 entertainment company. To demonstrate your understanding to potential employers, “pick a popular public company and analyze its financial health using the metrics above.”
It’s worth noting that financial analysts typically compute these day-to-day metrics using Excel. While you should have some familiarity with how to leverage Excel’s analysis capabilities, knowing the purpose of each formula is crucial.
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2. Walk me through a discounted cash flow (DCF) analysis and explain what it’s used for.
To perform a discounted cash flow (DCF) analysis, you forecast future earnings for a company or investment over a certain period of time. You then discount each cash flow and add the discounted flows together. The discount rate converts future cash flows to present value, and you commonly use a company’s WACC as the discount rate.
DCF analysis can help with budget and investment decisions for corporate finance professionals and small business owners alike. This analysis shows whether or not an investment or business venture is worthwhile. DCF valuation is also commonly used in mergers and acquisitions (M&A) to compare options.
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3. What business valuation techniques are you familiar with?
Business valuation methods help financial analysts understand and compare potential investment options, like mergers, acquisitions, and private equity investments.
The valuation approaches most financial analysts use include:
- Discounted cash flow valuation to see how well an investment will generate cash or revenue in the future
- Comparable company analysis to determine how a business stacks up to its peers and competition; comparable company analysis requires comparing companies of similar size, industry, and scope
- Enterprise value to understand a company’s market capitalization and profitability
- Book value to analyze a company’s total asset value minus its liabilities
- Liquidation value to determine how much would be left over if a company were to pay off all its debts and liquidate its assets
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4. How would you analyze a company’s stock?
Employers want to see that you can approach practical valuation situations and determine the proper technique. In addition to valuation methods like comparable company analysis and DCF valuation, you can discuss using a price-to-earnings (P/E) ratio for understanding a stock’s profitability and how you perform technical stock analysis.
Preferring one method over another is great because it shows you’ve thought critically about these types of analyses. However, remember to justify your opinions and explain why or when you would use one approach instead of another.
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5. Describe the different types of financial statements.
The three primary types of financial statements are:
- Cash flow statements describe where and how a company makes and spends money across operating, investing, and financing activities.
- Income statements show a company’s revenue and expenses and explain its net income for a given period.
- Balance sheets explain a company’s assets versus liabilities through things like shareholder equity, accounts payable, accounts receivable, and debts.
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6. What is the difference between capitalizing an asset versus expensing a purchase?
Financial analysis isn’t only about investments. Many financial analyst roles involve using core accounting skills. Understanding the different types of expenses and how they are recorded in a company’s financial statements is an essential skill for analysts.
A company would expense a purchase if it intends to consume the purchase immediately. Expenses are not investments; they are usually short-term assets like covering employee payrolls, paying rent, or purchasing product inventory.
If an item is more of an investment or something that will be consumed over a long period of time, it should be capitalized. Capitalized expenses (also called capital expenditures or capex) include buying a company car or a piece of manufacturing equipment.
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7. Explain the purpose of financial modeling.
Financial modeling allows analysts to predict the future and anticipate how decisions today may impact the business down the line. Analysts also rely on financial modeling to perform due diligence on investments — the better we understand a potential investment, the more informed our decisions are and the more reliable our outcomes will be.
Other reasons analysts use financial models include:
- Trying different scenarios or situations to avoid risk or maximize profits
- Planning strategically
- Allocating funds
- Assessing competition
Expert words of advice
“Interviewers aren’t just looking for a ‘right’ answer. They want to see your thought process, your problem-solving skills, and how you handle challenges.”
– Michael Dion
Behavioral Financial Analyst Interview Questions
Some interview questions are common in every interview, regardless of the role. Many are behavioral questions, which give you the opportunity to show off your personality and allow the interviewer to get to know you better. When asking these questions, interviewers want to see how you may fit in with the company culture and get an idea of your work style.
“Authenticity matters,” says Dion. “While technical skills are crucial, employers also value cultural fit and soft skills. Let your personality shine through.”
1. How do you ensure accuracy when handling large amounts of data or particularly stressful deadlines?
Accuracy is crucial in financial analysis. If you’re building a financial model, you need to make sure all the data is correct, or the forecast will be vastly inaccurate. Financial analysts also typically work under pretty intense deadlines that may make double-checking work complicated. (See how intense investment banking hours are!)
Remember to answer honestly, but some common ways professionals ensure they’re using the correct data regardless of how stressful the situation are:
- Asking coworkers to spot-check their work
- Building a habit of rechecking numbers as they go
- Managing their time and other work wisely to leave time to check the numbers
>>MORE: Learn how to improve your attention to detail skills.
2. Describe a time when you failed. How did you take it, and what did you learn?
Failure is inevitable — we’re all humans who make mistakes sometimes. The most important part is learning and growing from those mistakes.
Using an example from your life, explain how you failed and what that made you feel: Did you get angry? Did you feel scared to admit the mistake?
Then, talk about what came from the failure: Did you learn how to ask for help? Did you devise new strategies to avoid the mistake?
>>MORE: Keep your answers concise using the STAR method: Situation, Task, Action, Result. Describe the situation, what task you needed to complete, the actions you took, and the results of your actions!
3. Tell me about an instance when you disagreed with a colleague or manager. What happened?
Disagreements are bound to happen in any workplace. With the added pressure of many financial analyst roles and environments, you’re likely to have a different opinion than a coworker or even your manager. The interviewer wants to see if you can navigate differences in a calm and professional manager.
Some things to consider when preparing to answer this question are:
- What tactics did you use to talk through the disagreement?
- Did the situation get heated? If so, how did you contribute to diffusing the tension?
- Did you seek third-party advice or mediation?
- How was the relationship dynamic affected by the disagreement?
- What would you have done differently?
4. How do you balance accuracy and comprehension when explaining particularly complex analysis to other teams or outsiders?
Effectively communicating findings from detailed analysis can set you apart from the competition. Especially when talking to stakeholders, outsiders, or members from different teams, it’s important to keep your communication clear and simple so there’s no loss of comprehension.
Some ways professionals communicate findings include:
- Using data visualization to engage the audience and put data in a more memorable and readable context
- Only sharing the numbers that truly matter to not overwhelm the audience with superfluous details
- Relating information to well-known current events or scenarios so the audience can better understand the context
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Tips for Acing Financial Analyst Interviews
Research the Company
“Do your research on the company’s financial status, culture, and recent news and annual reports,” says Dion. “This will show that you’re genuinely interested and have taken the initiative to learn about them.”
Research may also help you figure out what skills or software programs you need to practice. For instance, if the company uses a specific type of software, like Bloomberg Terminal, you can study that platform and understand what skills you have that apply.
Rehearse Your Responses
Enlist the help of your friends or family members so you can practice commonly asked interview questions. By rehearsing your answers, you’ll feel more confident in the interview and be able to give the best responses possible.
Ask Questions
Don’t be afraid to ask for clarification or more information. Remember: you’re not expected to be an expert, but just saying you’re unsure isn’t an option.
Additionally, armed with the company research you’ve done, you can ask the interviewer questions. Asking questions helps you begin to form a bond with the interviewer, making you more memorable and allowing you to stand out among other candidates.
“Remember, every interview is a learning experience,” says Dion. “Take each one as an opportunity to refine your skills and get better for the next one.”
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