Credit Analyst Interview Questions

What are the most common credit analyst interview questions?

This guide outlines the most common credit analyst 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:

1. Technical skills (finance and accounting)
2. Social skills (communication, personality fit, etc)

This guide focuses solely on the technical skills that could be tested in a credit analyst interview.

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 ratio.

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 borrowers 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 LIBOR 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 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. A 3 statement model links income statement, balance sheet, and cash flow statement. More advanced types of financial models are built for valuation, plannnig, and.

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 FormulaReturn on assets (ROA), a form of return on investment, measures the profitability of a business in relation to its total assets. The ROA formula is used to indicate how well a company is performing by comparing the profit it's generating to the capital it's invested in assets.  The higher the return, the more, Debt/Capital, Debt/Equity, and Interest Coverage ratios.

What is the interest coverage ratio?

This is commonly caculated as EBIT divided by interest expense.  It is also referred to as the “times interest earned” ratio.  The interest coverage ratio 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/EBITDA, interest coverage, fixed charge coverage, 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 FormulaTerminal 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 as it makes up a large percentage of the total value of a business. There are two approaches to calculate terminal value: (1) perpetual growth, and (2) exit multiple 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.

Interview questions & answers you may find helpful:

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Other career prep resources

In addition to the above credit analyst interview questions, we have several other resources that are extremely helpful for becoming a credit analyst.

Our interactive career map is one of our most valuable tools for understanding how various jobs fit into the overall corporate finance universe.

Additionally, we offer several free courses for financial analysts which will teach you all the technical skills you need to ace an interview!