If you are applying for the position of a Financial Analyst at a firm, these interview questions and answers can help you prepare. Time to brush up on some basics!
1. What are the primary roles of a financial analyst?
Financial analysts work primarily with financial data generated by companies. The key aspects of their role involves analysing data to find out important information, determining the strengths and weaknesses of a business, designing policies, and helping a company with critical decision-making. Financial analysts may also predict profits and losses, and provide guidance regarding investment opportunities.
You may also specify the functions of the type of financial analyst position that you are interviewing for. If you have work experience, you can personalise your answer further and speak of the roles you have played in previous jobs.
2. What are the sources of data for a financial analyst?
The main sources of financial data are a company’s balance sheet, income statement and cash flow statement. The balance sheet provides the assets and liabilities of a company, the income statement provides the “bottom line” for a company for a fixed period of time, and the cash flow statement outlines how much money the company has generated over that period of time. All these statements provide the data which is analysed by financial analysts.
3. What are the components of a balance sheet? Why should they be analysed?
Balance sheets provide an outline of a company’s assets and liabilities in the form of resources, whether physical or financial, that the company possesses. Assets refer to both current and noncurrent assets. This includes cash and cashable assets as well as fixed assets like property and intangible assets like patents and copyrights. The liabilities section includes current liabilities, which are due within a year, and long-term liabilities.
Financial analysts need to look at the total number of assets and accounts to determine the strength of the company. Similarly, the presence of liabilities indicates possible debt and expenses, which need to be taken into account during financial analysis.
4. Walk me through an income statement.
An income statement has information about the performance of a company, as observed over a period of time. The main components of an income statement are usually revenues earned, expenses, and net income. Revenues may take into account any sales, royalties and interest earned. Meanwhile, expenses include the costs that the company has incurred. The net income or the “bottom line” indicate overall profits or losses.
5. How is a cash flow statement different from an income statement?
A cash flow statement is similar to an income statement, except that it only shows the money that has been generated by the company. Unlike income statements, it does not account for aspects like depreciation.
6. What is financial modelling?
Financial modelling is the quantitative analysis of a company’s earnings and expenses, where the resulting numbers represent aspects of the company’s operations. Financial models are built using spreadsheets, and are useful in imagining real world situations and assessing the effects of financial strategies, corporate decisions or economic policies in the near future.
To support your answer further, you may provide any real world examples of effective financial models to demonstrate in-depth knowledge. You may use any popular examples you have studied or talk about models you may have worked on in your professional past.
7. How would you define an expense model?
An expense model is a budget which is used to foresee potential profits or losses. It provides insight in all the costs of a business and is a common tool for responsible management of a company.
8. How do you differentiate between corporate finance and investment finance?
The basic difference lies in who carries out the financial analysis for a given company. In corporate finance, the analysis is done by an internal department, while in investment finance, external agents may be hired to conduct the analysis. Both function to help a company take better decisions regarding their money and how to manage it. Further, corporate financial analysis also looks at a company’s financial history and marks trends across seasons or time periods to provide estimates for future performance. Whereas, investment financial analysis can also look at other companies and their performance in order to assess them as potential investments.
9. What is the function of fundamental analysis?
Fundamental analysis finds out the value of a business by looking at data from financial statements and using ratio analysis. Financial analysts use ratios along with a close review of the company’s economic situation, and arrive at the intrinsic value for the security.
10. What does technical analysis do?
Technical analysis focuses on using statistics to track trends in prices and markets. Instead of analysing security values like fundamental analysis does, technical analysis looks at patterns and phenomena to derive information about the market.
11. Explain NPV.
NPV stands for Net Present Value and is used in investment planning, capital budgeting, and analyzing the profitability of a project or projected investment. The NPV can be presented as the difference between present value of expected cash flows and present value of invested cash, over a period of time. A positive NPV is taken as an indicator of a profitable investment, where the projected earnings are likely to exceed its expected costs.
12. What is ROI? Why would you consider ROI while evaluating potential investments?
ROI refers to Return on Investment, which is a metric used to evaluate the profitability of an investment. ROI is calculated by dividing the return of an investment by the cost of the investment, and then expressing the result as a ratio or percentage. Financial analysts consider the ROI of an investment to gauge potential profits or losses. If the ROI for an investment is net positive, an analyst like me may give the green signal to the company’s management.
13. What is an earnings announcement?
An earnings announcement is the official statement of a company’s profitability for a specified time period, which is shared with the public. It is usually preceded by estimates issued by analysts. If the company has experienced profits, it is likely that the share price will increase after the announcement has been made.
14. Define EPS.
EPS stands for earnings per share, which is calculated as a company’s profit divided by the shares of its common stock. The formula used calculates EPS as the net income minus preferred dividends, divided by outstanding shares. The result indicates how profitable a company is at a given point of time. Higher EPSs are generally interpreted as increased profitability.
15. How can you evaluate a company’s financial health?
The main pointers of a company’s financial health are its liquidity, leverage and profitability. Liquidity indicates the availability of cash and other relevant assets to cover current expenses and debt, while leverage refers to the proportion of investor money versus money contributed by creditors. Profitability, as the term suggests, refers to the financial return earned against the money invested.
16. Can you give me the formula for the acid test ratio?
The acid test ratio, or the quick assets ratio, is used to measure the liquidity of a company by calculating the proportion of its quick assets against any maturing debts. The formula for it is: Total Current Assets – Inventories / Total Current Liabilities. Alternatively, one can divide the sum of all liquid assets by total current liabilities.
17. What is the debt to equity ratio?
The debt to equity ratio is an essential metric used in corporate finance, related to risk and leveraging. It measures the degree to which a company’s operations are funded through debt as compared to its own funds. It also indicates the company’s ability to cover all outstanding debts using shareholder equity in case of a downturn. The debt to equity ratio is calculated by dividing total liabilities by its total shareholder equity.
18. What is ROE and what is it generally used for?
ROE is the return on equity ratio, which can also be called the Net Income/Owners’ Equity. This is usually recommended by financial analysts to evaluate a company’s profitability levels. The ratio shows how the company is using equity investment, and also works as a metric to compare with industry standards or competition.
19. How would you define horizontal analysis?
Horizontal analysis is a comparative financial statement which shows changes in corresponding items over a period of time. It compares statements for two or more periods, and is a good tool to observe and analyse contemporary trends.
20. What are the financial analysis tools or software you are familiar with?
For this answer, you may speak of popular financial analysis software or specify the ones you have used before to demonstrate your proficiency in working with such programs. Also make sure to show willingness in using or adapting to any programs which the company might prefer.
Tips for answering financial analyst interview questions
Here are a few tips to help you prepare better for your interview.
1. Know the company
It is good practice to look up the company you wish to join and find out as much as you can about their operations and performance in recent years. Look up any public records or news about their financial conditions and financial history. This will give you a closer look at the company and also help frame your answers in the interview.
2. Read up on ratios
Financial analysis uses a lot of ratio analysis which have specific formulas. In the chance that your interviewers decide to quiz you on your basics, it might be helpful to look up some common financial ratios while revising and preparing for a financial analyst interview. Besides the theory of it, also remember to mention how or where they are used.
3. Speak from experience
Theory can only go so far in establishing your knowledge about your industry. If you have prior working experience as a financial analyst or something in a similar capacity, use examples from your previous jobs. They demonstrate greater proficiency with knowing concepts and applying them in real world situations.
4. Show confidence
Financial analysts crunch numbers and help companies with critical decision making. In such a role, clear-thinking and confident candidates are more likely to shine in an interview. Maintain your composure and do not get confused, especially while answering questions which have no singular or specific “correct” answers.
5. Be polite and professional
Financial analysts usually work in corporate settings, where strict professionalism is greatly valued. You may know a lot about your subject and industry but knowing how to behave in the workplace is equally important. Pay attention to basic etiquette like being on time, dressing formally, and maintaining a respectful tone while answering.
Popular books to read for financial analyst interview
- How to Read a Balance Sheet by N Ramachandran and Ram Kumar Kakani
- Fundamental Analysis for Investors by Raghu Palat
- Romancing The Balance Sheet by Anil Lamba
- Damodaran on Valuation by Ashwath Damodaran
- Price Action Breakdown by Laurentiu Damir
- Financial Management by M. Y. Khan and P. K. Jain
- Technical Analysis of Financial Markets by John J. Murphy
- Trading: Technical Analysis Masterclass by Rolf Schlotmann and Moritz Czubatinski
- Financial Analysis and Modelling Using Excel and VBA by Chandan Sengupta
- Trading and Technical Analysis Course by Mandar Jamsandekar
Popular YouTube videos to see for financial analyst interview
- Analysis of Financial Statements
- Types of Financial Analysis
- Financial Ratios and Analysis
- Ratio Analysis (Liquidity and Activity Ratios)
- What is Financial Modelling?
- How to Build a Basic Financial Model in Excel
- Excel Crash Course for Finance Professionals
- How to Read a Financial Statement
- Financial Analyst Interview Questions and Answers
- Financial Analyst Interview Questions and Tips