Interview Question: One line item from each financial statement
Was going over some questions I got during SA interviews in preparation for FT recruiting and came across one I thought was pretty interesting. I was asked if you could pick one line item from each of the three financial statements when reviewing a company, what would they be?
I believe I said operating income from the income statement and cash flow from operations for the CF statement. Not sure what I said about the balance sheet.
Cheers.
My guess would be CFO, EBIT, and then depreciation from balance sheet? Im curious what the pros will say
Why would (accumulated) depreciation be of any use to you?
I look at financial statements 0 in what i do so i know i have know idea what im doing. Can I change my answer? haha EBITDA, CFO and current liabilities? maybe you can get an idea of working capt that way maybe not as well
Pick one item for what, exactly?
This is one of the questions where, as an interviewer, I'd be more interested in the interviewee's thought process and rationale rather than the actual answers.
Give me - EBITDA (not on formal P&L statements, but is often shown in reports and you can probably get away with this in an interview as long as you're prepared to admit it's not usually on audited accounts); - total interest bearing debt (which is two lines really - debt from current liabilities and non-current liabilities); and - closing cash balance from the cash flow statement.
I can then: - tell you the net debt/EBITDA multiple - useful for a potential lender, also tells me how much financial structure risk there is in the business (compared to my own assessment of how cyclical or exposed to competitive threats its earnings are) - choose a multiple based on the industry/type of business and give you an enterprise valuation (my multiple x EBITDA), hence I can value the equity in the business (EBITDA x multiple - net debt, where net debt = total debt - closing cash)
That's not a perfect analysis (ie I have no idea what capex spend is, which reduces cash flows available for debt service and indicates potential future funding requirement to support sales), but is a good start.
@notthehospitalER - you can use acc dep as a proxy for capex requirements
My thought process was that having one accumulated depreciation number (ie essentially in a vacuum) would be of no use because you have no time frame for context (I was assuming you don't have info regarding how long the business has been running and couldn't find an average depreciation number or anything). I was assuming you literally have the number and nothing else, essentially.
Yep - it's not a great proxy and pretty useless in isolation.
PS Also ask if you can see the same line items over multiple years. Then you can see: - How has leverage (net debt/EBITDA) changed over the years - has the company successfully delevered? - How cash balances have moved - from that, you can make some inferences (possibly incorrect) about CFO, equity raising, capex spend, combining that with what else you know about the business to support those inferences - Large differences in leverage or net debt - indicates refinancings (could be positive - indicates debt markets/other lenders have confidence in the business and are willing to finance it) - How has EBITDA improved/deteriorated - from there, you can make inferences on possible sales and/or margin trends
if they said "one line item," then my answer is wrong, but if they said "one thing" I'd say the notes to the financial statements.
otherwise I agree with CFO & EBITDA (depending on the industry, depreciation is a real expense for some companies), but I'm struggling with Balance sheet. if it's one ratio, I'd want the quick ratio, but that requires 2 line items. oh well.
what is the context? (LBO or stock pitch? debt investor?)
Honestly don't remember exact context, but I believe it was framed in terms of an acquisition.
Assuming I get historical data, but we're being strict on the line item deal probably Revenue, CFO and Gross PPE.
It's not pretty, but if you do some bending you can get a lot of decent stuff out of those three I think.
Edit: just saw it's for an acquisition. I'd still use those three. I'd be too concerned about op leases to rely on only one debt account
I feel like this question is mostly an attempt to ask a question surrounding how the 3 statements work together / overall understanding that isn't a common one straight out of an interview guide, meaning I will get an overly rehearsed answers. IMO some of these answers are overly technical.
If I asked this question in an interview, it would either be a test that you could link together a cohesive thought instead of spitting out "revenue, cash, CFO because they are all important" or to test you knew what is key in a certain job / industry, as in if you were applying to a PEG and you gave answers that made more sense if you were applying to a FIG group in IB.
My guess is that the interviewer just wanted to know what you first look at. Like everyone above mentioned, context is a big deal. Equity / Debt point of view are very different. On the acqusition front I would look at cash (cash is king on the debt side), EBITDA, and CFO. I kind of like the question, good way to tell if you actually understand financial statements.
From a sell-side M&A perspective, the straightforward answer is simply FDSO and earnings.
Nemo nesciunt vel voluptates blanditiis nam. Ut consequatur et aperiam quibusdam. Ratione nemo vitae qui ut omnis sapiente. Fuga quia reprehenderit maxime eum omnis.
Quasi aut labore magnam sapiente. Enim sed exercitationem doloremque esse. Eum deleniti quasi quasi ut. Maiores est esse inventore fuga nisi officiis.
Sint voluptas autem qui ab nulla aut rerum voluptatum. Perferendis recusandae facere id ipsum. Unde sint natus sapiente corrupti minima reiciendis. Rerum eius laboriosam id porro perspiciatis. Officia exercitationem error quibusdam illo.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...