PE Interview Question: What is the most important piece of information about a company (if you had to select one thing)?

How would you guys think about answering the question below:

What is the most important piece of information about a company (if you had to select one thing)?

I know that you can answer this question in a variety of ways, but wanted to see how you guys would answer the question. Thanks!

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Comments (21)

Mar 6, 2018

I'll start the bidding: Free Cash Flow

Mar 8, 2018

Yes, and maybe the management (?)

MBB employee and alumnus
Mar 6, 2018

I mean I think the obvious one is cash flow but I'd go with attractiveness/marketability at exit. If you can't exit, your IRR will undoubtedly get hammered as time drags on and you can't sell at an attractive valuation. Even if the business doesn't generate a ton of cash flow but you can sell at a premium because of some tech/unique business model, you can still hit your IRR by selling earlier.

Mar 7, 2018

EBITDA. With that you can sketch out rough valuation based on industry comps, likely max debt, relative size/screening metric, etc.

With a few assumptions you can even do a quick paper LBO based solely on EBITDA

Doesn't account for growth, margins, capex/nwc, market position, industry dynamics, etc.

    • 1
Mar 7, 2018

Such a dumb question (by your interviewer)

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Mar 7, 2018

depends what is key driver of returns (growth / cash generation etc.) But generally speaking cash flow to equity yield at entry. argument being it's the theoretical minimum return you'd earn if nothing changes and so if you can get in at an ~8-10%+ that's a defensible point to start off.

Mar 8, 2018

Stable cashflow for generic strategies.

Mar 8, 2018

The relation of price to value.

Price defined as: what do I have to pay?
Value defined as: what do I think it is worth?

Or alternatively expected IRR.

Based on these metrics, you can already make an investment decision. Just cash flows doesnt tell you if you should invest (also there are assets where CF is meaningless)

Mar 8, 2018

Best question - how much will they sell for?

This question has the biggest impact on returns, exceeding the fundamentals of the business massively. Who cares what you can pay for the business or the various financial engineering you can do to achieve a return? The only thing that matters to return is price - everything else is secondary.

Mar 8, 2018

Doesn't this assume you already have some fundamental understanding of the business in order to determine the relative value of that selling price?

Mar 9, 2018

Agree. In my view that is the single most important question. What business is in, services and products.

Mar 8, 2018

Business model. You can derive everything else by the model and history of the business.

    • 1
Mar 8, 2018

A similar question was asked back in 2010 and received some pretty good feedback from the community. Here is a link to that thread: https://www.wallstreetoasis.com/forums/pe-intervie...

    • 1
Mar 6, 2018

Good call. The highlighted "best answer" in that thread gives a more PE-specific response.

Mar 8, 2018

You could try and inject levity in the interview and answer, "the share price a year from now."

Mar 8, 2018
  1. Can the firm scale within a given time horizon. Need proof that the business is able to scale to get a worth while return. Also, the business has to be able to scale within a reasonable time period, i.e. where is the fund at in its life.
Mar 8, 2018

Asking on behalf of those who have answered in this thread/ask this question in PE interviews, but is this question more of how you'd defend your answer vs what it actually is? Obviously it's most likely EBITDA, management, and the like but is the crux of the question your reasoning behind the choice?

Best Response
Mar 8, 2018

I'd ask this question. I don't really care about the exact response. The purpose in asking the question is just to get the person talking through their understanding of financial statements. It avoids me having to ask a specific accounting question directly (which can fluster people). And in the course of a conversation about, say, why EBITDA or FCF is important, I can ask questions about other aspects of valuation that I think the candidate might be overlooking.

My go to question in interviews, though, is asking a person to tell me about everything that's not on their resume. I read your resume before I invited you in for interviews. Other people have asked you about your CV. If you're talking to me, you're qualified for the job. I want to know how you grew up. What type of high school did you attend? What does your family do? I want to understand what drives your thinking. And i want someone to be honest about what motivates them to work so hard. The personality fit and backstory matter a lot given that my team is small. I only get a few chances to really pick who I get to work with on a daily basis, so I care more about thought process and fit than anything else.

    • 8
Mar 8, 2018

That's awesome man, thank you

Mar 9, 2018
Mar 10, 2018
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