What are the Most Common Credit Analyst Interview Questions?
This guide outlines the most common credit analystCredit Analyst JobsCredit analyst jobs encompass a wide range of positions. In general, a credit analyst is responsible for helping a lender or other financial institution – interview questions and what CFI believes are the best answers to them!
In order to ace your next interview, you’ll need to focus on being well rounded, which includes the following:
- Technical skills (finance and accounting)
- Social skills (communication, personality fit, etc)
This guide focuses solely on the technical skills that could be tested in a credit analyst interview. To learn more technical skills, check out CFI’s Credit Analyst Certification programCBCA™ CertificationThe Certified Banking & Credit Analyst (CBCA)™ accreditation is a global standard for credit analysts that covers finance, accounting, credit analysis, cash flow analysis, covenant modeling, loan repayments, and more. . Below are our top credit analyst interview questions.
What is a reasonable Debt/Capital ratio?
It completely depends on the industry. Some industries can sustain very low debt to capital ratios, typically cyclical industries like commodities or early-stage companies like startups. These might have a 0-20% debt to capital ratio. Other industries such as banking and insurance can have up to 90% debt to capital ratios.
Many analysts also use the debt to equity ratioDebt to Equity RatioThe Debt to Equity Ratio is a leverage ratio that calculates the value of total debt and financial liabilities against the total shareholder’s equity..
How would you decide if you can lend $100 million to a company?
Review all three financial statements for the past five years and perform a financial analysis. Determine what assets can be used as collateral, how much cash flow there is, and what the trends of the business are. Then look at metrics such as debt to capital, debt to EBITDAEBITDAEBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company's profits before any of these net deductions are made. EBITDA focuses on the operating decisions of a business because it looks at the business’ profitability from core operations before the impact of capital structure. Formula, examples, and interest coverage. If all of these metrics are within the bank’s parameters, then it may be possible to lend the money, but the decision will depend on qualitative factors as well.
What do the credit rating agencies do?
Rating agencies are supposed to help provide trust and confidence in financial markets by rating borrowersCorporate InformationLegal corporate information about Corporate Finance Institute (CFI). This page contains important legal information about CFI including registered address, tax number, business number, certificate of incorporation, company name, trademarks, legal counsel and accountant. on their creditworthiness of outstanding debt obligations. They can, however, run into conflicts of interest and should not be blindly relied on for assessing a borrower’s risk profile.
What is the current LIBOR rate?
Quote the current LIBORLIBORLIBOR, which is an acronym of London Interbank Offer Rate, refers to the interest rate that UK banks charge other financial institutions for a short-term loan maturing from one day to 12 months in the future. LIBOR acts as a benchmarking base for short-term interest rates rate and talk about the importance of LIBOR as it relates to spreads and pricing of other credit instruments.
What is Free Cash Flow?
Free cash flowCash FlowCash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of CF is simply equal to cash from operations minus capital expenditures (levered free cash flow). Unlevered free cash flow is used in financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model..
What methods do you use to compare the liquidity, profitability, and credit history of a company?
The Current Ratio, Return on Equity (ROE)Return on Equity (ROE)Return on Equity (ROE) is a measure of a company’s profitability that takes a company’s annual return (net income) divided by the value of its total shareholders' equity (i.e. 12%). ROE combines the income statement and the balance sheet as the net income or profit is compared to the shareholders’ equity., Return on Assets (ROA)Return on Assets & ROA FormulaROA Formula. Return on Assets (ROA) is a type of return on investment (ROI) metric that measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing by comparing the profit (net income) it's generating to the capital it's invested in assets., Debt/Capital, Debt/EquityDebt to Equity RatioThe Debt to Equity Ratio is a leverage ratio that calculates the value of total debt and financial liabilities against the total shareholder’s equity., and Interest Coverage ratios.
What is the interest coverage ratio?
This is commonly calculated as EBIT divided by interest expense. It is also referred to as the “times interest earned” ratio. The interest coverage ratioInterest Coverage RatioInterest Coverage Ratio (ICR) is a financial ratio that is used to determine the ability of a company to pay the interest on its outstanding debt. indicates how easily a company can “cover” it’s interest expense with operating earnings before interest and taxes are subtracted.
What are the most common credit metrics banks look at?
The most common credit metrics include debt/equity, debt/capital, debt/EBITDADebt/EBITDA RatioThe net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio measures financial leverage and a company’s ability to pay off its debt. Essentially, the net debt to EBITDA ratio (debt/EBITDA) gives an indication as to how long a company would need to operate at its current level to pay off all its debt., interest coverage, fixed charge coverageFixed-Charge Coverage Ratio (FCCR)The Fixed-Charge Coverage Ratio (FCCR) is a measure of a company’s ability to meet fixed-charge obligations such as interest and lease expenses., and tangible net worth.
How do you value a company?
The most common methods are DCF valuation / financial modeling and relative valuation methods using comparable public companies (“Comps”) and precedent transactions (“Precedents”).
What do you use for the discount rate in a DCF valuation?
If you are forecasting free cash flows to the firm, you normally use the Weighted Average Cost of Capital (WACC)WACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. The WACC formula is = (E/V x Re) + ((D/V x Rd) x (1-T)). This guide will provide an overview of what it is, why its used, how to calculate it, and also provides a downloadable WACC calculator as the discount rate. If you are forecasting free cash flows to equity, you use the cost of equity.
How do you calculate the terminal value in a DCF valuation?
Terminal valueDCF Terminal Value FormulaDCF Terminal value formula is used to calculate the value a business beyond the forecast period in DCF analysis. It's a major part of a financial model is calculated either using an exit multiple or the Gordon Growth (growing perpetuity) method.
What type of person makes a good credit analyst?
Someone who’s detail-oriented, good with numbers, enjoys research and analysis, likes working independently, and is good at financial modeling and financial analysis, with strong Excel skills.
How do you manage risk in your personal life?
This is where you get to show some personality and demonstrate your ability to think about risk, plus be a good communicator. There is no right or wrong answer to this question, but you could say something about how you evaluate tradeoffs (upside vs downside), how you put hedges in place to reduce losses, purchase insurance, or you can use a wide range of other examples.
More interview guides
If you’re looking for more practice, there can be a lot of overlap between interview questions for credit analysts and other areas of corporate finance.
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Other career prep resources
In addition to the above credit analyst interview questions, we have developed an entire program for becoming a certified credit analystCBCA™ CertificationThe Certified Banking & Credit Analyst (CBCA)™ accreditation is a global standard for credit analysts that covers finance, accounting, credit analysis, cash flow analysis, covenant modeling, loan repayments, and more. .
Our interactive career map is one of our most valuable tools for understanding how various jobs fit into the overall corporate finance universe. You may also wish to learn about the top credit analyst certificationsTop Credit Analyst CertificationsList of the top credit analyst certifications. Get an overview of the best financial certifications for professionals around the world working in the field. that exist in the market.
Additionally, we offer several free courses for financial analysts which will teach you all the technical skills you need to ace an interview!
