Be it a bank, an institution, or any well-known corporation, most of the time, financial analyst job interview questions are tricky and challenging. That’s why they require thorough preparation, professional financial knowledge, and practical exposure to financial modelling and other analytical skills.
The job role of financial analysts is to gather, organise, analyse, and present data and information which forms the basis of recommending financial decisions to all the stakeholders. Since the role directly affects the financial management of any organization, the recruiters take extra efforts to hire a skilled financial analyst who matches the company’s requirements and roll on worthy business decisions.
But before you scroll down to questions, we have a piece of advice
“Though there are a lot of opportunities for financial analysts in the industry, the chances of getting into one of the top financial companies can be boosted if you are a Chartered Financial Analyst (CFA).”
Here are the answers to some of the most frequently asked Financial Analyst interview questions for the position of a financial analyst:
Q1. Explain ‘financial modelling’.
Ans. Financial modelling is a quantitative analysis commonly used for either asset pricing or general corporate finance. Basically, 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 modelling is one of the most primary key skills, you can also share your experience about using different financial models including discounted cash flow (DCF) model, initial public offering (IPO) model, leveraged buyout (LBO) model, consolidation model, etc.
Q2. 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 a day in and day out you have to use cash flow statements to successfully build a three model statement.
When a recruiter shoots 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 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
Q3. Is it possible for a company to have 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 –
(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
When you define such situations, it proves that you are not plainly 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.
Q4. What do you think is the best evaluation metric for analysing 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)
Q5. 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.
Q6. 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 cost which forms a basis of accurately forecasting the company’s expected profit or loss.
Q7. 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 lay man’s terms, journals are the raw books that play a pivotal role in preparing 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 question 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 in order 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
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Q8. 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 of time.
Q9. What is ‘cost accountancy’?
Ans. This is an important question which nowadays a lot of employers ask since they look for a financial analyst who 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 the purpose of managerial decision making.
Q10. 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.
Q11. 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
Q12. What are ‘adjustment entries’?
Ans. Adjustment entries are accounting journal entries that convert a company’s accounting records to the accrual basis of accounting.
Q13. 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.
Q15. 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)
Q16. What is ‘capital structure’?
Ans. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.
Q17. What is ‘goodwill’?
Ans. Goodwill is an asset that captures excess of the purchase price over the fair market value of an acquired business.
Q18. 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
Q19. 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
Q20. 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
Q21. How is Cash Flow different from Free Cash Flow (FCF)?
Ans. Free cash flows (FCF) refers to 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.
Q22. As a financial analyst which factors do you constantly analyse?
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 on the basis of 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
Q23. Which tools do you use for advanced financial modelling?
Ans. Some of the essential business intelligence tool (BI tool) helpful ar:
- Oracle BI
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Q24. 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 to choose between cash flow or income, the better idea is to gauge the company’s liquidity on the basis of cash flow, since using earning is a more reliable approach.
The Parting Note
The above questions and answers will help you in your preparation for the next interview for the position of a financial analyst. It will provide you with an idea of the type of questions that are generally asked. Apart from this, you also need to be prepared to answer all types of questions — technical skills, interpersonal, leadership or methodology.
If you are looking to be successful in the financial industry, enrol yourself for a financial analyst certification course to understand the techniques and skills required to be an expert.