What does a Financial Analyst do?

The role of financial analysts is to audit or inspect the economy. Along with this, they
also assist the industries and companies to decide in investment decisions for banks,
corporations, investment firms and insurance companies.

They are said to be the title for many chore responsibilities which can be budgeting,
accounting, or cost analysis.

The main aspect required to attend a financial analyst interview is to present your skills
in analyzing the economic conditions and understanding the basic financial analysis.

Explain ‘financial modelling’.

Ans. Financial modelling is a quantitative analysis commonly used for either asset
pricing or general corporate finance.

Walk me through a ‘cash flow statement.’

Ans. You’ll have to be well-prepared for this question. Start with the net income and go
line by line explaining all major adjustments to arrive at cash flow from operating
activities. Mention all the necessary parts that are associated with it.

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

Ans. Yes,There are two examples –

(i) a company that is selling off inventory but delaying payables will show positive cash
flow for a while even though it is in trouble.

(ii) A company has strong revenues for the period but future forecasts show that
revenues will decline.

What is ‘working capital’?

Ans. Working capital is the best defined as current assets minus current liabilities.

Explain quarterly forecasting and expense models?

Ans. The analysis of expenses and revenue which is predicted to be produced or

incurred in future is called quarterly forecasting.

An expense model tells what expense categories are allowed on a particular type of
work order.

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) statementshows revenues and expenses during
a set period of time.

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
analyse the profitability of a projected investment or project.

How many financial statements are there? Name them

Ans. There are four main financial statements – 1) balance sheets, 2) income statements,
3) cash flow statements, and 4) statements of shareholders’ equity.

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.

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)

When should a company consider issuing debt instead of equity?

A company should always optimize its capital structure. If it has taxable income it can
benefit from the tax shield of issuing debt. If the firm has immediately steady cash flows
and is able to make their interest payments it may make sense to issue debt if it lowers
the WACC.

How do you calculate the WACC?

WACC (weighted average cost of capital) is calculated by taking the percentage of debt
to total capital, multiplied by the debt interest rate, multiplied by one minus the
effective tax rate, plus the percentage of equity to capital, multiplied by the required
return on equity.

Which is cheaper, debt or equity?

Debt is cheaper because: it is paid before equity and has collateral backing it. Debt ranks
ahead of equity on liquidation of the business. Learn more about the cost of debt and
cost of capital.

There are pros and cons to financing with debt vs. equity that business needs to
consider… it is not automatically better use debt finance simply because it’s cheaper. A
good answer to the question may highlight the tradeoffs, if there is any follow up
required.

What in your opinion makes a good financial model?

It’s important to have strong financial modelling fundamentals. Wherever possible

model assumptions (inputs) should be in one place and distinctly colored (typically
bank models use blue font for model inputs). Good Excel models also make it easy for
users to understand how inputs are translated into outputs. Good Excel models also
include error checks to ensure the model is working correctly (e.g. the balance sheet
balances, the cash flow calculations are correct, etc.). They contain enough detail, but
not too much, and they have a dashboard that clearly displays the key outputs with
charts and graphs. For more, check out our complete guide to financial modelling.

How do you record PP&E and why is this important?

There are essentially 4 areas to consider when accounting for Property, Plant &
Equipment (PP&E) on the balance sheet: initial purchase, depreciation, additions
(capital expenditures), and dispositions. In addition to these four, you may also have to
consider revaluation. For many businesses, PP&E is the main capital asset that
generates revenue, profitability and cash flow.

Mention the single best evaluation metric for analyzing company stock?

There is no specific answer to this analyst interview question and hence, it is mandatory
to mention a reasonable point of evaluation and explain the context for using the
metrics.

When you estimate a company, mention the first point as the operating margin
profit as the metric.

Mention that you opt for this metric because it shows the management of the company
overall apart from the basic profitability.

The price earnings to growth ratio can also be mentioned as a single most complete
equity valuation metric.

You can give a reason that it considers projected earnings growth rate and also higher
ranked commonly used price/ earnings ratio (P/E).

Make sure to pick any evaluation metric that you prefer is the best. The main trick in
answering this question is explaining the strength of the particular metric that you
mention.

Explain quarterly forecasting, expense models and updating revenue?

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

The product or the service and its respect and demand in the market are mentioned as
revenues.

At times when it is mentioned that revenues would boom, it means that profits will
enhance and also the expenses would elevate when compared with incomes.

What challenges are you expecting in this financial analyst position?

The right way to move forward with this question is to mention the ways you would
utilize your financial analyst skills and experiences in the job role that you would be
hired for.

You can mention that you are a person who is boosted by challenges and also possesses
the capacity to face any challenges in the career.

You can also make a point that you have the skills and knowledge to handle any
challenge in the job. Remember to mention the goals as well as challenges you met
prior.

What is the difference between journal entry and a ledger?

The book which has the original entry is called a journal. The book is mandatory one as
it has all the transactions that associate to the company for the specific financial year.

The journal can also be mentioned as the mother of the ledger. In this scenario, all the
accounts are portioned as debit and credit as per rules.

The ledger is one which has particular accounts which is taken from the original journal.

What are your career goals?

By asking this question the employer would test your ambition and ability to develop
yourself and also plan for your future as a financial analyst.
When you have not decided on the goals then mention that you’re busy with the
organization and its duties and hence focus on long-term goals.

If you have short term goals or career oriented goals then you can mention them that
what you desire to become in the next 2 or 5 years.