So you’ve been booked for an interview session.
Congratulations! You’re one step ahead in the right direction to secure that dream job—as a financial analyst!
But one thing stops you—your joy is short-lived because you’re not sure how to present yourself before that hiring panel and answer their questions right.
Answering interview questions and pitching have something in common—they all need to convince and persuade people to act in favor of the respondent.
A winning pitch starts with a winning logline—the same applies to answering interview questions.
To influence the people who can turn your dream into a reality, you need to deliver your interview answers in a clear, concise, engaging, exciting, and straightforward way.
Interviewees are asked a version of these same questions throughout their careers:
- Tell us about yourself.
- Why are you interested in this position?
- Do you have any questions for us?
If you can answer them in one or two compelling sentences, you can hook your audience.
Since the challenge of facing the interview cuts across the board—including financial analysts—I’ve put together a comprehensive guide that has some of the main questions and answers you can expect in a financial analyst interview.
More than that, the guide is designed to help you conquer the fear in your mind so that you can speak the language the hiring panel understands—and persuade them to hire you.
Ready to learn? Let’s get started!
What Are Recruiters Looking for in Financial Analysts?
Let’s start from here. What are the hiring managers looking for in financial analysts?
A report published by SHRM indicates that, according to 86% of recruiters and 62% of employers, the current job market is entirely candidate-driven.
What this means is that more employers are focusing on experience and skills.
In other words, what are you going to bring to the table as a financial analyst?
The hiring managers want to hire individuals who are passionate about the work they do, the company they work for, and the product or service they’re promoting.
All of the employee qualities you might think of are certainly important, but they are not as important as being passionate about the work you do.
When you understand that, it becomes easier to figure out how to present yourself at the table and deliver exactly what the panel is looking for.
Before we break into some of the interview questions and answers prepared for you to guide your way into the heart of the interview, let’s familiarize ourselves with the financial analyst job description.
Why is it important? for a good reason—most of the questions you’re going to tackle in that interview have at least one thing tied to the job description. So pay attention until the end.
If you’re interested in learning more about the career, you can read my complete guide on How To Become a Financial Analyst: Complete Guide or Is Finance a Good Career Path for You?
Position Summary: What Does a Financial Analyst Do?
To start with, financial analysts are mostly employed in banks, pension funds, and insurance companies, among other businesses, to guide businesses and individuals in making data-informed decisions about expending money to attain profit.
In other words, they assess the performance of stocks, bonds, and other types of investments.
In a nutshell, your work is to gather data, organize information, analyze historical results, make forecasts and projections, make recommendations, and generate financial models, presentations, and reports.
Therefore, this gives us a hint as to what the hiring team in the recruitment office is looking for. They’re looking for individuals with the relevant skills and experience to execute the above job responsibilities.
Let’s look at some of the common financial analyst questions and answers in the next section.
I’ve put them together—each question and answer in their relevant categories to help you understand them.
1. What are the key financial statements, and what information do they provide?
There are three key financial statements:
- The balance sheet
It shows a company’s assets, liabilities, and shareholders’ equity.
- The cash flow statement
It shows cash inflows and outflows from operating activities, investing activities, and financing activities.
- The income statement
It outlines the company’s revenues, expenses, and net income.
2. How do you evaluate the financial performance of a company’s competitors?
The first step to evaluating the financial performance of a competitor is to determine key data like your gross profit ratio, current ratio, net profit ratio, etc. This becomes a standard against which you compare it with the competitor or benchmark it against the industry average. This involves looking at the core activities that give the company its competitive advantage and then looking at the performance measures relating to those core activities.
3. What metrics and KPIs do you use to evaluate the financial health of a company?
The four main areas that should be examined to determine the financial health of a company are liquidity, solvency, profitability, and operating efficiency.
However, of the four, perhaps the best measurement of a company’s health is its level of profitability—it’s the one that I use.
While several different profitability ratios can be useful—including gross profit margin and operating profit margin—net profit margin is a must to evaluate the financial health of a company.
There are 5 questions that help me streamline the financial health of a company:
- Are our sales and profits increasing or decreasing year-over-year? Is there a trend?
- Is my business making enough profit compared to other similar companies?
- Can the company meet its short-term obligations?
- Is the company taking advantage of financing to operate and grow?
- Are we managing the assets of the company effectively?
4. How do you calculate a company’s cost of capital?
The best way that I used to calculate the cost of capital involves adding the company’s total interest expense for each debt for the year, then dividing it by the total amount of debt.
Cost of Capital = Total Interest Expense / Total Amount of Debt
Ultimately, since the cost of capital encompasses the cost of both equity and debt, it is weighted according to the company’s preferred or existing capital structure.
5. How do you perform ratio analysis?
There are six steps that I use to perform the ratio analysis. They include:
Identify and pick the relevant financial ratios to be analyzed, including liquidity ratios, profitability ratios, solvency ratios, and efficiency ratios.
Collect the necessary, accurate, and reliable financial data from the company’s financial statements, such as the balance sheet, income statement, and cash flow statement.
Use the formulas for the selected financial ratios, such as the current ratio, quick ratio, gross profit margin, net profit margin, debt-to-equity ratio, return on equity (ROE), and return on assets (ROA), to calculate them based on the financial data collected.
Once the ratios are calculated, the next step is to interpret the results in the context of the company’s financial performance. Compare the calculated ratios with industry benchmarks or historical data to determine trends, patterns, or anomalies that may indicate strengths or weaknesses in the company’s financials.
Based on the interpretation of the ratios, draw conclusions and provide insights into the company’s financial health, performance, and stability.
Lastly, is to clearly and effectively communicate my findings and insights to the company.
6. Can you walk me through a discounted cash flow (DCF) analysis?
Discounted cash flow (DCF) refers to a valuation technique that estimates the value of an investment using its expected future cash flows.
This analysis attempts to determine the value of an investment today based on projections of how much money that investment will generate in the future.
There are 5 steps involved:
Project out cash flows for 5 or so years, depending on the company’s stability. Discount these cash flows to account for the time value of money.
Determine the terminal value of the company— assuming that the company does not stop operating after the projection window.
Discount the terminal value to account for the time value of money.
Sum the discounted values to find an enterprise value.
Subtract net debt and divide by diluted shares outstanding to find an intrinsic share price.
7. How do you perform sensitivity analysis?
Sensitivity analysis is performed in analysis software such as Excel by taking a single event and determining different outcomes of that event in relation to the company.
To perform a sensitivity analysis, we follow these steps:
Define the base case of the model.
Calculate the output variable for a new input variable, leaving all other assumptions unchanged.
Calculate the sensitivity by dividing the % change in the output variable over the % change in the input variable.
If I perform an NPV analysis using a discount rate of 10%, sensitivity analysis can be performed by analyzing scenarios of 5%, 8%, and 15% discount rates as well by simply maintaining the formula but referencing the different variable values.
8. How do you evaluate a company’s credit risk?
The best way to determine a company’s ability to pay its debt, banks and bond investors is to evaluate the company’s financial ratios, cash flow analysis, trend analysis, and financial projections.
Eventually, the outcome of the credit analysis determines the risk rating to assign to the company.
Here is an example using the debt service coverage ratio (DSCR), we can measure the level of cash flow available to pay current debt obligations, such as interest, principal, and lease payments.
If the debt service coverage ratio is below 1, it indicates negative cash flow.
9. What is the difference between equity and debt financing?
Debt financing involves the borrowing of money directly from an external source, whereas equity financing involves selling a portion of the company’s equity in the hope of securing financial backing.
What this means is that when equity investors buy a stake in your company, your own shareholding decreases, whereas with debt financing, you retain full ownership.
Additionally, creditors get interest expenses, which are fixed. However, in the case of equity financing, the company pays a dividend to the investors when it is declared.
10. Can you explain the difference between financial leverage and operating leverage?
The operating leverage is used to indicate how a company’s costs are structured, while the financial leverage is used to indicate the amount of debt used to finance the operations of a company.
In other words, operating leverage estimates the impact of fixed costs by measuring the degree to which a firm can increase operating income by increasing revenue, while financial leverage assesses the impact of interest costs.
11. How do you evaluate a company’s return on investment (ROI)?
The company’s ROI is calculated by dividing the benefit (or return) of an investment by the cost of the investment, and the result is expressed as a percentage or a ratio. It shows the probability of an investment vehicle producing a return.
ROI = (Benefit or Return of Investment / Cost of Investment) x 100%
If a company helps a startup get established with $100,000 in capital, the company might gain 10,000 start-up shares.
ROI = ($110,000 / $100,000) x 100% = 110%
12. How do you determine a company’s valuation?
The value of the company’s balance sheet is a starting point for determining the company’s worth.
It takes shape by adding up the value of everything the company owns, including all equipment and inventory, and subtracting any debts or liabilities.
When valuing a company as a going concern, there are three main valuation techniques:
- DCF analysis
- Comparable company analysis
- Precedent transactions
13. How do you assess a company’s liquidity and solvency?
To determine the solvency of a company, we look at the balance sheet and cash flow statement. If the value of its assets is greater than its liabilities, then the company is declared solvent and is therefore forced into bankruptcy.
Liquidity is a factor used to determine a company’s ability to pay off current debt obligations without raising external capital. To assess it, one has to look at a number of factors, such as financial statements, liquidity ratios, cash flow, and creditworthiness.
14. Can you explain the impact of macroeconomic factors on a company’s financial performance?
The macroeconomic variables have a great correlation with financial performance in that they may expose firms to critical dangers of loss— they determine if the company is either moving towards growth or slumping.
Positive macroeconomic variables, for instance, stimulate growth and create financial stability within an economy and company setup by injecting more cash to encourage businesses to expand, and the opposite is true.
15. How do you identify potential merger and acquisition targets?
The best way to identify acquisitions is to identify potential M&A targets that align with our strategic objectives and have the potential to create long-term value for the company as a matter of priority. This involves research and analysis of the following:
- Steady growth rate
- Product portfolio diversification
- History of innovation
- Market leadership or niche specialty
- Management team
- Special legal, regulatory or environmental issues
1. What is your approach to financial modeling and forecasting?
The best way to carry out financial forecasting is through the straight-line or moving average method, which uses historical figures and trends to predict future revenue growth.
Determine the sales growth rate that will be used to calculate future revenues.
Assume growth will remain constant into the future.
To forecast future revenues, we take the previous year’s figure and multiply it by
the growth rate.
In some other cases, it is possible to use simple linear regression or multiple linear regression to forecast results based on the relationship between two or more variables.
Financial modeling involves gathering information from forecasts and other data and then simulating discrete scenarios to analyze what impact they might have on the company’s financial health.
If you’re interested in learning more about healthy examples that can guide you in financial modeling, I recommend that you read my guide, Real Estate Financial Modeling: A Detailed Guide. It gives you a typical example of financial modeling but in a real estate setting.
2. What is your experience with financial modeling? Can you give me an example of a model you have built?
During the COVID-19 pandemic in 2020–2021, my company had to create new financial models to adjust its short-term forecasts based on the sudden and dramatic economic downturn.
I used integrated budgeting and planning tools to help my company adapt quickly and mitigate the impact of COVID-19. It helped us see the effects of various possible outcomes related to the pandemic.
3. How do you stay up-to-date on industry trends and news?
Staying up to date with industry trends, news, and knowledge helps you stay ahead of developments and changes. Some of the best ways to do so include:
1. Studying statistics.
2. Monitoring the business.
3. Pay attention to social media.
4. Reading industry newsletters.
5. Keep in touch with your customers.
6. Read interviews with industry leaders.
7. Watching and monitoring competitors.
8. Use analytical tools such as Google Trends.
9. Getting out of the office and engaging with customers
10. Getting involved in your industry associations, events, training, and participating in online communities.
11. Getting to know people in the industry—and outside of it—through these conversations is sure to spark ideas.
12. Getting beyond your own industry, market, and region to learn what people in unrelated fields are doing.
4. Can you provide an example of a time when you identified an opportunity for cost savings or revenue growth for a company?
In 2020, in the wake of Covid-19, I was working as a financial analyst for a manufacturing company, and I noticed that the cost of raw materials was increasing.
After conducting research and analysis, I identified an opportunity for cost savings by switching to a more affordable supplier or negotiating better prices with existing suppliers.
I presented my findings to the management team, and after evaluating the opportunity, they decided to switch to a new supplier.
This opportunity not only saved us on costs but also cushioned us against heavy spending at a time when there was a shortage of resources due to the unprecedented nature of the crisis that brought the world to a standstill.
5. What is your experience with budgeting and forecasting?
As a financial analyst, my experience with budgeting and forecasting includes creating and managing budgets, developing financial models to forecast future performance, and analyzing variances between actual and budgeted results.
I use financial software and tools, such as Excel or specialized budgeting and forecasting software, to perform these tasks.
Additionally, I collaborate with other departments and stakeholders in the company to ensure the budgeting and forecasting processes align with the company’s strategic objectives and goals.
1. What is your experience with financial statement analysis software such as Excel or Bloomberg?
My experience with financial statement analysis software includes using Excel and/or Bloomberg to perform financial analysis tasks such as creating financial models, analyzing financial statements, and monitoring financial markets.
I also use these tools to identify trends and patterns in financial data, conduct scenario analysis, and generate reports and presentations to communicate financial analysis findings to the company’s top leadership and stakeholders.
All the questions discussed above are just a representation of what to expect during the interviews; it’s important to read them carefully and internalize them for better engagement with the hiring panel.
Most importantly, focus on giving a personalized approach when answering the questions in the interview. Remember, before the interviews, it will be beneficial to familiarize yourself with the company, their goals, and aspirations, among others.
This will help you speak the language they can understand, which involves talking about how you can benefit them rather than who you are.
Because the internet has no expiration date, mounds of information and disinformation are served up daily on various sites.
If you aren’t careful, implementing bad or outdated advice—especially on sensitive matters such as interviews—can lead to disastrous results at the end of the day, costing you the much-needed job opportunity.
Do yourself a favor and just focus on the above essentials. By doing so, you will be setting yourself up for long-term success in breaking into any career through elevator pitching-level interviews.
Now that you’ve gone through this guide, I’m confident that you’re sure to prepare well and win your interviews.
Go for it!
Hi, I’m Avadhut, Founder of FinanceWalk. We help you make a rewarding career in any field based on your Inner GPS 🙂.
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