Over last few years, big changes have taken place in the financial services industry globally. As a fresher you may be pitted against an experienced professional from the KPO of a global i-bank or small-time boutique investment bank. The fact that you have been invited for an interview means your CV has taken you through the first step of screening! However, make sure you know each and every word in your CV. Questions can emerge purely based on the assignments you mentioned there.
A rational interviewer would typically appreciateyour work experience level or the fact that you are a fresher. What matters to him is your approach to finding solutions, more than the accuracy of these solutions.What matters is if you are coming to the point quickly or beating around the bush. Further, how willing are you to work in unstructured situations and build on them.
Here are the 10 questions. I am not giving answers to these questions. I am just providing the reason why these questions would be asked with a hope to give you some food for thought and better way to prepare for an interview. I’ll provide my version of answers to these questions in my next article.
1. Do you track stock market? Which company is your favorite?
WHY: The level of activity, movement and direction of stock markets affect the work of investment bankers or equity research firms. Further, if you have been tracking companies, that means you are taking an active interestin investment analysis, and studying fundamentals of a companies, which are the key tasks that you have to do in this job.
2. What is EBITDA? Why is an important measure?
WHY: EBITDA or Earnings before Interest, Tax, Depreciation & Amortization is a crude estimate of the Operating Cash Flow of the business. It is equal to the Operating Cash Profit. This is one indicator of operating performance of the company and is not affected by the capital structure or financial management. When analyzing and commenting upon the business, you should give due importance to operating performance measurement and as a result, EBITDA analysis.
3. Which is the most important ratio for an equity investor? Tell me the connection between Working Capital turnover and Return on Equity?
WHY: In addition to skills onFinancial Statements analysis and calculating ratios, yourunderstanding of utility and inter-linkage between various ratios is very significant. Return on Equity (RoE) is a vitalratio for an equity investor. It is imperative that you know Du PontAnalysis (Drilling down Return on Equity (RoE) to find its ultimate drivers i.e. Net Margin, Asset Turnover and Financial Leverage). Further, spend some time reading the relationship between Return on Capital Employed (RoCE) and RoE too.
4. How would you estimate the market size for adult diapers or car stereo systems?OR Estimate the revenues of Facebook or Quikr. How would you go about it?
WHY: This question is just an example.However, here the objective is to understand how you approach an unstructured situation or where no direct data may be available. These are common in a banking and research job. The question has examples of industries which may not be large or organized enough.The companies could be start-ups, private, belonging to a new sector or in fact creating a new segment.
5. What is Working Capital? Is negative working capital good for a business?
WHY: They don’t say ‘Cash is King’ for nothing. Cash is the most important element, sometimes, even more crucial than profitability. There are ample examples of businesses flourishing because of efficient working capital management and equal examples of them going down due to poor inventory or receivables management.Investment in Working Capital, Cash Conversion or Working Capital Cycle can drive revenues, returns and most importantly liquidity. The insights based on this are vital parts of analysis of business and business models.
6. How much time have you spent on MS Excel, Word and PowerPoint? Tell me about [this] project from your CV.
An average analyst spends most of her work day on these 3 MS Office tools, either creating or editing models, write-ups or presentations. As a result, you must spend ample time skilling and building efficiency in these three applications MS Word, Excel and PowerPoint. Get yourself familiar with frequently used keyboard shortcuts and try to limit your use of mouse. You are going to have an edge above the rest, if you can demonstrate great working knowledge of these tools.
7. What is Value? Tell me how you will calculate your own value right now? What is the importance of acquisition of 26%, 51% and 76% stake in real world?
WHY: Bankers, as a part of their advice to clients, are expected to discover a valuation range for business. This may be using various methods like the Discounted Cash Flow, comparable companies, transaction benchmarking, asset replacement method, startup valuation approachesetc. Similarly, research analysts are required to give recommendations on stocks (buy, sell, hold) based on valuation. As a result, this is one area of expertise you must be thorough with.
The level of stake (26%, 51%, 76%, etc.) leads to important insights like significant minority, control, strategic stake acquisition, associate or subsidiary companies, etc. These insights are to be drawnbased onparallel reading and interpreting from the Accounting standards, Companies Act, Takeover regulations and other relevant regulations.
8. Please explain the calculation of Cost of Equity to me using the CAPM model. What is Beta?
WHY: Inestimating the valuation range, the Weighted Average Cost of Capital or Discount Rate is driven by Cost of Equity. The Capital Asset Pricing Model (CAPM), a popular approach to finding Cost of Equity, is driven by Beta, Risk Free Rate,Equity Market Premium. An analyst is expected to know the theoretical and practical concepts around these.
9. Write commentary on the financial status of [this] company based on their Annual Report.
WHY: This is to test your strengths in 3 areas
- Financial Statement Analysis
- Generating Meaningful Insights
- Writing and Communication Skills
Analysts typically prepare company profiles and competitive landscapes. Financial commentary is a crucial placeholder in such slides.
10. How to derive the Cash Flow statement from the Balance Sheet and Income Statement? Tell me the components of Cash Flow
WHY: This one activity can tell about the depth of your understanding of accounting and financial statements. In the indirect method of preparing the Cash flow statement, you use the opening and closing Balance Sheets and the Income Statement. The way you answer this question also tells me how much importance you give to Operating Cash Flow vis-à-vis other activities i.e. Financing and Investing
Additionally, there could be more questions like:Tell me about what you know this industry? Do you know about us (Employer)? Tell me about particular Accounting Policy or Principle, Why should we hire you? Can you prepare a financial model in an hour? Tell me 3 key reasons why the Balance Sheet may not match? How do Stock options affect the Income Statement and the Balance Sheet? Tell me more about leverage ratio. How is it good or bad for the business?
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