Equity Research Interview Questions (with Answers)

Equity Research Interview Questions

If you are called for an equity research interviews, you can be asked any question from anywhere. You should not take this lightly as this can change your Finance career. Equity Research interview questions are a mix of technical and tricky questions. So, you need to have thorough knowledge in financial analysis, valuation, financial modeling, the stock market, current events, and stress interview questions.

Let’s find out below the top 20 Equity Research interview questions that are repeatedly asked for the positions of equity research analystsEquity Research AnalystsAn equity research analyst is a qualified professional who interprets financial information and trends of an organization or industry to provide recommendations, opinions, reports, and projections on the corporate stocks to facilitate equity trading.read more.

Equity Research Interview Questions

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Equity Research Interview Questions (with Answers) (wallstreetmojo.com)

Question #1 – Do you know the difference between equity value and enterprise value? How are they different? 

This is a simple conceptual equity research interview question, and you need to first mention the definition of enterprise valueDefinition Of Enterprise ValueEnterprise Value is a measure of a company's total value that spans the entire market rather than just the equity value. It includes all debt and equity-based ownership claims. This value, which is calculated as the market value of debt + market value of equity - cash and cash equivalents, is particularly relevant when valuing a takeover.read more and equity value and then tell the differences between them.

Enterprise Value Vs Equity Value Diagram

Enterprise value can be expressed as follows –

Whereas, the equity value formulaEquity Value FormulaEquity Value, also known as market capitalization, is the sum-total of the values the shareholders have made available for the business and can be calculated by multiplying the market value per share by the total number of shares outstanding.read more can be expressed as follows –

  • Equity Value = Market Capitalization + Stock Options + Value of equity issued from convertible securities – Proceeds from the conversion of convertible securities.

The basic difference between enterprise value and equity value is enterprise value helps investors get a complete picture of a company’s current financial affairs; whereas, equity value helps them shape future decisions.

Question # 2- What are the most common ratios used to analyze a company?

It can be classified as the most common equity research interview question. Here is the list of common ratios for financial analysis that can be divided into 7 parts –

#1 – Solvency RatioSolvency RatioSolvency Ratios are the ratios which are calculated to judge the financial position of the organization from a long-term solvency point of view. These ratios measure the firm’s ability to satisfy its long-term obligations and are closely tracked by investors to understand and appreciate the ability of the business to meet its long-term liabilities and help them in decision making for long-term investment of their funds in the business.read more Analysis

#2 – Turnover Ratios

#3 – Operating Efficiency Ratio Analysis

#4 – Operating Profitability Ratio Analysis

#5 – Business RiskBusiness RiskBusiness risk is associated with running a business. The risk can be higher or lower from time to time. But it will be there as long as you run a business or want to operate and expand.read more

#6 – Financial RiskFinancial RiskFinancial risk refers to the risk of losing funds and assets with the possibility of not being able to pay off the debt taken from creditors, banks and financial institutions. A firm may face this due to incompetent business decisions and practices, eventually leading to bankruptcy.read more

#7 – External Liquidity RiskLiquidity RiskLiquidity risk refers to 'Cash Crunch' for a temporary or short-term period and such situations are generally detrimental to any business or profit-making organization. Consequently, the business house ends up with negative working capital in most of the cases.read more

Question #3  What is Financial Modeling, and how is it useful in Equity Research?
What is Financial Modeling

If you are new to the valuation model, then please go through this Free training on Financial Modeling.

Question #5 –  What is Free Cash Flow to Firm

This is a classic equity research interview question. Free cash flow to the firm is the excess cash that is generated after taking into consideration the working capital requirements as well as the cost associated with maintaining and renewing the fixed assets. Free cash flow to the firm goes to the debt holders and the equity holders.

FCFF diagram

Free Cash Flow to Firm or FCFF Calculation = EBIT x (1-tax rate) + Non Cash Charges + Changes in Working capital – Capital Expenditure

You can learn more about FCFF hereFCFF HereFCFF (Free cash flow to firm), or unleveled cash flow, is the cash remaining after depreciation, taxes, and other investment costs are paid from the revenue. It represents the amount of cash flow available to all the funding holders – debt holders, stockholders, preferred stockholders or bondholders.read more.

Question #6 –  What is Free Cash Flow to Equity?

Though this question is frequently asked in valuation interviews, however, this can be an expected equity research interview question. FCFE measure how much “cash” a firm can return to its shareholders and is calculated after taking care of the taxes, capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more, and debt cash flows.

FCFE model has certain limitations. For example, it is useful only in cases where the company’s leverage is not volatile, and it cannot be applied to companies with changing debt leverage.

FCFE and Debt Ratio

FCFE Formula = Net Income + Depreciation & Amortization + Changes in WC + Capex + Net Borrowings

You can learn more about FCFE hereFCFE HereFCFE (Free Cash Flow to Equity) determines the remaining cash with the company's investors or equity shareholders after extending funds for debt repayment, interest payment and reinvestment. It is an indicator of the company's equity capital managementread more.

Question #7 – What’s earning season? How would you define it? 

Appearing for equity research interview? – Be sure to know this equity research interview question.

equity research interview question

source: Bloomberg.com

In our industry, companies will announce a specific date when they will declare their quarterly or annual results. These companies will also offer a dial-in number by using which we can discuss the results.

  • One week prior to that specific date, the job is to update a spread-sheet, which will reflect the analyst’s estimates and key metrics like EBITDA, EPS, Free Cash Flow, etc.
  • On the day of the declaration, the job is to print the press release and swiftly summarize the key points.

You can refer to this article to learn more about earning seasonEarning SeasonThe Earnings season refers to the quarterly report of companies' results, such as revenue/profits, released in the first two weeks after each quarter ends (Dec, Mar, Jun, Sep). It helps investors in making investment decisions and determining the value of their investments.read more.

One of the technical equity research interview questions.

Financial Modeling Interview Questions - Sensitivity Analysis
  • As we see from above, in the base case assumption of Growth rate at 3% and WACC of 9%, Alibaba Enterprise Value is $191 billion.
  • However, when we can our assumptions to say a 5% growth rate and WACC as 8%, we get the valuation of $350 billion!
Question #9 – What is the “restricted list” and how it affects the work you do?

This is a nontechnical equity research interview question. To ensure that there is no conflict of interest, a “restricted list” is being created.

When the investment banking team is working on closing a deal that our team has covered, we’re not allowed to share any reports with the clients, and we will not be able to share any estimate as well. Our team will also be restricted from sending any models and research reports to clients. We will also not be able to comment on the merits or demerits of the deal.

Question #10 – What are the most common multiples used in valuation? 

Expect this expected equity research interview question. There are few common multiples which are frequently used in valuation –

Question #11 –  How do you find the Weighted Average Cost of Capital of a company?

WACC is commonly referred to as the Firm’s Cost of Capital. The cost to the company for borrowing the capital is dictated by the external sources in the market and not by the management of the company. Its components are Debt, Common Equity, and Preferred Equity.

The formula of WACCFormula Of WACCThe WACC Formula is a way of evaluating a firm's cost of capital in which each category is weighted proportionately. It is the average rate that a company is expected to pay to its stakeholders in order to finance its assets. In simple terms, it is the minimum return that the firm should earn on its existing asset base in order for investors and lenders to be interested, so as to avoid them from investing elsewhere.read more = (Wd*Kd*(1-tax)) + (We*Ke) + (Wps*Kps).

where,

Question #12 –   What is the difference between Trailing PE and Forward PE?

Trailing PE Ratio is calculated using the earnings per share of the past; however, Forward PEForward PEForward PE ratio uses the forecasted earnings per share of the company over the next 12 months for calculating the price-earnings ratio. Forward PE ratio formula = Price per share/Projected earnings per share read more Ratio is calculated using the forecast earnings per share. Please see below an example of Trailing PE vs. Forward PE Ratio.

Trailing PE and Forward PE Example
  • Trailing Price Earning Ratio formula = $234 / $10 = $23.4x
  • Forward Price Earning Ratio formula = $234 / $11 = $21.3x

For more details, have a look at Trailing PE vs. Forward PE

Question #13 –  Can Terminal value be Negative?

This is a tricky equity research interview question. Please note that it can happen but only in theory. Please see the formula below for Terminal Value.

Terminal Value Formula - Perpetuity Method - Type 2

If, for some reason, WACC is less than the growth rate, then Terminal Value can be negative. High growth companies may get negative terminal values only due to misuse of this formula. Please note that no company can growth at a high pace for an infinite time period. The growth rate that is used here is to a steady growth rate that the company can generate over a long period of time. For more details, please have a look at this detailed Guide to Terminal valueGuide To Terminal ValueTerminal Value is the value of a project at a stage beyond which it's present value cannot be calculated. This value is the permanent value from there onwards. read more.

This equity research interview question is asked repetitively.

The ideal way to answer this question is to pick a few good stocks large cap, mid-cap stockMid-cap StockMid-Cap stocks are the stocks of the companies having medium market capitalization. Their capital lies between that of large and small cap companies and valuation of the entire share holdings of these companies range between $2 billion to $8 billion.read more, & small cap, etc.) and pitch the interviewer about the same. You would tell the interviewer that you would invest $10 million in these stocks. You need to know about the key management executives, few valuation metrics (PE multiples, EV/EBITDA, etc.), and few operational statistics of these stocks so that you can use the information to support your argument.

Similar types of questions where you would give similar answers are –

  • What makes a company attractive to you?
  • Pitch me a stock etc.
Question #15 – What PE ratio of a high tech company is higher than the PE of a mature company? 
PE-Ratio-Google-Apple

The basic reason for which the PE of the high tech company is higher is maybe that the high tech company has higher growth expectations.

  • Why is it relevant? Because the expected growth rate is actually a PE multiplier –
  • [{(1 – g)/ROE}/(r – g)]
  • Here, g = growth rate; ROE = Return on Equity & r = cost of equity.

For high growth companies, you must use a PEG RatioPEG RatioThe PEG ratio compares the P/E ratio of a company to its expected rate of growth. A PEG ratio of 1.0 or lower, on average, indicates that a stock is undervalued. A PEG ratio greater than 1.0 indicates that a stock is overvalued.read more instead of a PE Ratio.

Question #16 – What is BETA?

This is among the top 5 most expected equity research interview questions. Beta is a historical measure which represents a tendency of a stock’s return compared to the change in the market. Beta is usually calculated by using regression analysisRegression AnalysisRegression analysis depicts how dependent variables will change when one or more independent variables change due to factors, and it is used to analyze the relationship between dependent and independent variables. Y = a + bX + E is the formula.read more.

A beta of 1 would represent that the stock of a company would be equally proportionate to the change in the market. A beta of 0.5 means the stock is less volatile than the market. And a beta of 1.5 means the stock is more volatile than the market. Beta is a useful measure, but it’s a historical one. So, beta can’t accurately predict what the future holds. That’s why investors often find unpredictable results using beta as a measure.

Let us now look at Starbucks Beta Trends over the past few years. The beta of Starbucks has decreased over the past five years. This means that Starbucks stocks are less volatile as compared to the stock market. We note that the Beta of Starbucks is at 0.805x

Starbucks-Beta
Question #17 –  Between EBIT and EBITDA, which is better?

Another tricky equity research interview question. EBITDA stands for Earnings before interest, taxes, depreciation, and amortization. And EBIT stands for Earnings before interest and taxesEBIT Stands For Earnings Before Interest And TaxesEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more. Many companies use EBITDA multiples in their financial statements. The issue with EBITDA is it doesn’t take into account the depreciation and amortization as they are “non-cash expenses.” Even if EBITDA is used to understand how much a company can earn, it still doesn’t account for the cost of debtThe Cost Of DebtCost of debt is the expected rate of return for the debt holder and is usually calculated as the effective interest rate applicable to a firms liability. It is an integral part of the discounted valuation analysis which calculates the present value of a firm by discounting future cash flows by the expected rate of return to its equity and debt holders.read more and its tax effects.

For the above reasons, even Warren Buffett dislikes EBITDA multiples and never likes companies which use it. According to him, EBITDA can be used where there is no need to spend on “capital expenditure,”; but it happens rarely. So every company should use EBIT, not EBITDA. He also gives examples of Microsoft, Wal-Mart & GE, which never use EBITDA.

Question #18 – What are the weaknesses of PE valuation?

This equity research interview question should be very simple to answer. There are a few weaknesses of PE valuation, even if PE is an important ratio for investors.

  • Firstly, the PE ratio is too simplistic. Just take the current price of the share and then divide it by the recent earnings of the company. But does it take other things into account? No.
  • Secondly, PE needs context to be relevant. If you look at only the PE ratio, there is no meaning.
  • Thirdly, PE doesn’t take growth/no growth into account. Many investors always take growth into account.
  • Fourthly, P (the price of share) doesn’t consider debt. As the market price of a stock is not a great measurement of market value, debt is an integral part of it.
Question #19 Let’s say that you run a Donut franchisee. You have two options. The first is to increase the price of each of your existing products by 10% (imagining that there is price inelasticity). And the second option would be to increase the total volume by 10% as a result of a new product. Which one should you do and why?

This equity research interview question is purely based on economics. You need to think through and then answer the question.

First of all, let’s examine the first option.

After examining these two options, it seems the first option would be more profitable for you as a franchise owner of KFC.

Question #20 –  How would you analyze a chemical company (chemical company – WHAT?)?

Even if you don’t know anything about this equity research interview question, it’s common sense that chemical companies spend a lot of their money into research & development. So, if one can look at their D/E (Debt/Equity) ratio, then it would be easier for the analyst to understand how well the chemical company is utilizing their capital. A lower D/E ratio always indicates that the chemical company has strong financial health. Along with D/E, we can also have a look at Net Profit marginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization's overall profitability after incurring its interest and tax expenses.read more and P/E ratio.

Recommended Articles

This article has been a guide to Equity Research Interview Questions. Here we provide you with the list of most common technical as well as non technical equity research interview questions with answers. You may have a look at these other recommended resources to learn more –

Prepare well and give your best shot. All the best for your Equity Research interview!

Reader Interactions

Comments

  1. Manmohan says

    I myself take interviews of candidates in Technical rounds, hence found your questions upto the mark and even planning to inculcate during next rounds. Kudos to you , for your hard work.

    • Dheeraj Vaidya says

      Thanks for your kind words!

  2. Michael Chan says

    I am an investor relation manager but yet still very much benefited from this technical info that you have compiled and shared.
    Very grateful and well done!

    • Dheeraj Vaidya says

      thanks Michael! glad you liked this one :-)