The Four Types of Technicals You WILL Get Asked In Your Investment Banking Interview

Investment banking interviews are intense, and candidates often face a series of tough technical questions. Among these, four main types emerge as particularly significant: the three financial statements, valuation techniques, merger models, and restructuring concepts. A strong understanding of these areas is essential for anyone aiming to excel in the competitive investment banking field. This blog post explores each of these technical types, offering practical insights and tips to enhance your preparation.

Three Financial Statements (Accounting)

The cornerstone of financial analysis is the three key financial statements: the income statement, balance sheet, and cash flow statement.

The income statement summarizes a company's revenues and expenses over a specific period, ultimately showing net income or loss. For instance, if a company reports sales of $500,000 and expenses of $300,000 for the year, its net income is $200,000. Grasping how to read this statement is crucial, as it reflects a company's profitability and performance.

The balance sheet provides a snapshot of a company's financial status at a given moment, detailing assets, liabilities, and shareholders' equity. For example, if a company has total assets of $1 million and total liabilities of $600,000, it has equity of $400,000. Understanding the balance sheet is vital for assessing a company's liquidity and financial stability.

Finally, the cash flow statement tracks the movement of cash in and out of a business, categorized into operating, investing, and financing activities. For instance, a company may report $100,000 in cash from operating activities but $50,000 in cash spent on investments, giving a net cash flow of $50,000. This statement is critical for understanding how a company generates and uses cash, which is often a central focus for investors.

Candidates should be prepared to explain how these statements interconnect. For example, net income from the income statement becomes retained earnings on the balance sheet and serves as the starting point for the cash flow statement. Mastery of these basics is essential for success.

Valuation Techniques

Valuation is a core aspect of investment banking, helping to determine a company's value. There are several methods for valuing a business, but three of the most prominent techniques include Discounted Cash Flow (DCF) analysis, Comparable Company Analysis (Comps), and Precedent Transactions.

Discounted Cash Flow (DCF) analysis estimates a company's future cash flows and discounts them to their present value using an appropriate discount rate. For example, if projected cash flows for the next five years total $1 million and the discount rate is 10%, the present value of those cash flows is approximately $620,921. A solid grasp of financial modeling is necessary, as is an ability to make sound assumptions about growth rates and discount rates.

Comparable Company Analysis (Comps) evaluates similar companies within the same industry to derive valuation multiples, like EV/EBITDA or P/E ratios. If a peer company has a P/E ratio of 15 and your company has similar growth prospects, a P/E ratio of around 14 to 16 may be reasonable, providing a benchmark for valuation.

Precedent Transactions analysis looks at historical transactions of similar companies to determine valuation multiples. For instance, if a company in the same industry was acquired for 8 times its EBITDA, this multiple may serve as a useful guide for assessing your target company's potential sale price.

Candidates should understand the benefits and drawbacks of each valuation method, as well as when to use them. Additionally, knowing how to adjust multiples based on individual company factors is key.

Merger Models / Merger Math

Merger models are crucial for grasping the financial implications of mergers and acquisitions (M&A). Candidates should understand the basic ideas of merger math, including accretion and dilution analysis.

Accretion/Dilution analysis assesses if a merger will raise (accrete) or lower (dilute) the acquiring company's earnings per share (EPS). For example, if the acquiring company has an EPS of $3 and the merged entity has an EPS of $2.50, the deal may dilute the original EPS. Candidates need to know how to calculate the purchase price, financing structure (either cash, stock, or debt), and anticipated synergies from the merger. Being able to explain the rationale behind a merger and its expected upsides is vital during interviews.

Furthermore, candidates should be ready to discuss how different financing options impact the overall deal structure and the acquirer's balance sheet. Understanding these elements will highlight your analytical skills.

Restructuring

Understanding restructuring is essential in investment banking, especially when dealing with troubled companies. Candidates should know the different types of restructuring: financial, operational, and capital restructuring.

Financial restructuring focuses on reorganizing a company's debt and equity to enhance financial stability. This could mean negotiating with creditors, refinancing existing debt, or, in extreme cases, seeking bankruptcy protection.

Operational restructuring aims to boost a company's efficiency and profitability by streamlining operations, cutting unnecessary costs, or selling non-essential assets. For example, a company facing high operational costs might find savings by reducing its workforce by 10%, leading to significant yearly cost reductions.

Capital restructuring involves adjusting the capital structure, such as issuing new shares or taking on additional debt, to better align with strategic goals. Candidates should discuss how different capital structures affect a company's risk level and cost of capital.

During interviews, you may be tasked with evaluating a case involving a distressed company and suggesting a restructuring plan. Articulating the reasons behind your recommendations and predicting the outcomes is crucial for making an impact.

Final Thoughts

Preparing for investment banking interviews requires a robust understanding of four main types of technicals: the three financial statements, valuation techniques, merger models, and restructuring concepts. Mastering these areas will not only prepare you to answer technical questions with confidence but will also showcase your analytical skills and comprehension of the investment banking landscape. We recommend using a tool like AskStanley AI (https://www.askstanley.ai) to help you crush your interviews and nail your technicals.

As you study, focus on understanding how these concepts intertwine and practice expressing your thoughts clearly. With thorough preparation and a solid grasp of these technicals, you will be well-prepared to meet the formidable challenges of your investment banking interview.

Financial statements laid out for analysis