Answers / Financial Due Diligence
What metrics would you use to assess the quality of earnings for a company with a high proportion of recurring revenue, and how would you use these metrics to identify potential risks or areas for improvement?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
I would use metrics such as the ratio of recurring revenue to total revenue, the retention rate of recurring revenue, and the growth rate of recurring revenue. I would also analyze the company's billing and collection practices, as well as its revenue recognition policies, to ensure they are transparent and consistent. Additionally, I would review the company's customer concentration and churn rates to identify potential risks.
WHAT INTERVIEWERS LISTEN FOR
- ✓Recurring revenue ratio
- ✓Retention rate
- ✓Growth rate
COMMON MISTAKES
- ✗Low retention rate
- ✗High customer concentration
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS
- Give me 3 examples of QoE adjustments.
- A company shows 30% revenue growth. What would you investigate?
- How would you handle a situation where management proposes a large add-back?
- How do you analyze revenue quality for a SaaS company?
- How do you handle a company with significant related-party transactions?
- How would you handle a situation where the target company's management proposes a large add-back to EBITDA, and what factors would you consider when evaluating the justification for the add-back?