(Shared from the Vault.com Blog, original post penned by Derek Loosvelt)
Case interviews aren’t just for consultants any more. Many investment banks give questions that could, under other circumstances, be called case interviews–they often involve both strategy and quantitative know-how. The best way to prepare for any interview is to prepare. Here is one such question.
What is a company that you follow closely? Is it a good investment? Tell your interviewer you would look at various criteria to determine if it’s a worthwhile investment, including:
Earnings growth: Determine how fast the company’s earnings are expected to grow, looking at the following factors (among others): the company’s historic growth rate; earnings growth rates of other companies in the industry; growth rate of the market the company services; analyst estimates; and perhaps building your own financial model in Excel to test various assumptions.
Industry analysis: Evaluate the industry the company is in to determine whether this is an attractive industry in which to invest. Look at factors including: how rapidly the industry is growing; whether the industry is consolidating; how intense the competition is among competitors; whether market players have pricing power; and whether products are considered commodities.
Competitive advantages: Evaluate whether the company has any competitive advantages over its competition, such as patents, exclusive contracts, a differentiated product, brand equity, a lower cost structure, or superior management.
Valuation: Given its prospects, is the company a good value? You would compare the company’s expected earnings growth to various valuation measures, like price-to-earnings ratio, price-to-sales ratio, and price-to-book-value. You would also compare these valuation measures to other companies in the industry to determine whether the company is relatively expensive or relatively affordable.
Portfolio considerations: Finally, you would want to determine whether an investment in the company fits well with your overall portfolio and objectives. You would want to ask questions like: Does the company help diversify risk in your portfolio? Does the company meet your portfolio’s risk profile?