Rimjhim Dubey

Financial Analyst
Interview
Questions and
Answers
“A Complete Guide”

Source: Finance Walk

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.

Rimjhim Dubey
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.

Rimjhim Dubey
Technical/Job-related Financial Analyst Interview Questions

1. What are the key financial statements, and what information

do they provide?
Ans. 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?
Ans. 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.

Rimjhim Dubey
3. What metrics and KPIs do you use to evaluate the financial health of a
company?
Ans. 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?

Ans. 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.
Rimjhim Dubey
5. How do you perform ratio analysis?
Ans. There are six steps that I use to perform the ratio analysis. They
include:
Step 1.
Identify and pick the relevant financial ratios to be analyzed, including
liquidity ratios, profitability ratios, solvency ratios, and efficiency ratios.
Step 2.
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.
Step 3.
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.
Step 4.
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.
Step 5.
Based on the interpretation of the ratios, draw conclusions and provide
insights into the company’s financial health, performance, and
stability.
Step 6.
Lastly, is to clearly and effectively communicate my findings and
insights to the company. Rimjhim Dubey
6. Can you walk me through a discounted cash flow (DCF)
analysis?
Ans. 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:
Step 1.
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.
Step 2.
Determine the terminal value of the company— assuming that
the company does not stop operating after the projection
window.
Step 3.
Discount the terminal value to account for the time value of
money.
Step 4.
Sum the discounted values to find an enterprise value.
Step 5.
Subtract net debt and divide by diluted shares outstanding to
find an intrinsic share price.
Rimjhim Dubey
7. How do you perform sensitivity analysis?
Ans. 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:
Step 1.
Define the base case of the model.
Step 2.
Calculate the output variable for a new input variable,
leaving all other assumptions unchanged.
Step 3.
Calculate the sensitivity by dividing the % change in the
output variable over the % change in the input variable.

For example:
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.

Rimjhim Dubey
8. How do you evaluate a company’s credit risk?
Ans. 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.

Rimjhim Dubey
8. How do you evaluate a company’s credit risk?
Ans. 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.

Rimjhim Dubey
10. Can you explain the difference between financial leverage
and operating leverage?
Ans. 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)?
Ans.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%
For example:
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%

Rimjhim Dubey
12. How do you determine a company’s valuation?
Ans. 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?

Ans.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.

Rimjhim Dubey
14. Can you explain the impact of macroeconomic factors on a
company’s financial performance?
Ans. 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?

Ans. 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
Profitability
History of innovation
Market leadership or niche specialty
Management team
Special legal, regulatory or environmental issues

Rimjhim Dubey
Behavioral/Experience-based Questions:
1. What is your approach to financial modeling and
forecasting?

Ans. 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.
Step 1.
Determine the sales growth rate that will be used to calculate
future revenues.
Step 2.
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.
Step 3.
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.

Rimjhim Dubey
2. What is your experience with financial modeling? Can you give me an
example of a model you have built?
Ans. 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?

Ans. 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.
Rimjhim Dubey
4. Can you provide an example of a time when you identified an
opportunity for cost savings or revenue growth for a company?
Ans. 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?

Ans. 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.

Rimjhim Dubey
Problem-solving/Analytical Questions
1. What is your experience with financial statement analysis software
such as Excel or Bloomberg?

Ans. 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.

Final Thoughts
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.
Rimjhim Dubey
Catch more of these
posts by following
me!

Rimjhim Dubey