Industry & Group

A capitalization rate is net operating income divided by property value, so it is the unlevered going in yield on the asset at the current price. A low cap rate means you are paying a high price for each dollar of income. It reflects some mix of low risk, strong location, tenant credit quality and expected rental growth. It is a multiple turned upside down: cap rate is one over the multiple.

• Net operating income divided by property value
• The unlevered going in yield on the asset
• Low cap rate means expensive, or low risk with strong expected growth
• It is the reciprocal of an income multiple
• Roughly discount rate less growth, so growth compresses it

Whether you interpret a low cap rate rather than just reciting the formula. The interpretation is the answer.

ARPU is average revenue per user: revenue in a period divided by average subscribers. It matters because a subscription business has only two revenue levers, how many subscribers you have and how much each one pays. Splitting revenue that way tells you whether growth came from adding customers or from raising price, and those two have very different durability and very different incremental margin.

• Revenue in the period divided by average subscribers
• Decomposes revenue growth into volume and price
• Price led growth drops almost entirely through to margin
• Subscriber led growth carries acquisition cost and later churn
• Check the denominator: net adds, gross adds, average versus period end

Whether you can decompose growth rather than just recite the ratio. The follow-up is always which of the two levers is doing the work.

Because for a bank, debt is raw material rather than financing. Deposits and borrowings fund the loan book, so interest is an operating cost and there is no clean split between operating and financing activities. Enterprise value exists to strip out capital structure, which for a bank strips out the business itself. So you value the equity directly: price to book, price to tangible book, price to earnings, or a dividend discount model.

• Debt is an input to bank operations, not merely a way of funding assets
• Interest is an operating cost, so EBITDA has no meaning
• Operating and financial assets cannot be separated on the balance sheet
• Capex and working capital do not mean what they mean elsewhere
• Use equity metrics: price to book, tangible book, earnings, or a DDM

Whether you say debt is raw material. That single sentence is what the interviewer is listening for.

Same store sales, or like for like, measures growth only at stores that have been open for a full comparable period, usually a year. It strips out growth bought by opening new stores, which any retailer with capital can do. What is left is whether the existing estate is genuinely getting better. Total revenue rising on negative like for likes means growth is being bought rather than earned.

• Growth only at stores open for a full comparable period, usually twelve months
• Removes the effect of new openings and of closures
• Isolates whether the existing estate is actually improving
• Revenue growth with negative like for likes signals bought growth
• Check whether e commerce and refurbished stores are in the base

Whether you explain what it deliberately excludes and why that matters, rather than just defining it.

ARR is annual recurring revenue: the annualized value of subscription contracts in force at a single point in time. Reported revenue is what was recognized over a completed past period under the accounting rules. ARR is forward looking and a snapshot, revenue is backward looking and a period measure, so in a fast growing company ARR runs well ahead of trailing revenue. ARR also excludes one off services.

• ARR is a point in time annualized run rate of recurring contracts
• Revenue is recognized across a completed period under accounting rules
• In a growing company ARR sits well above trailing twelve month revenue
• ARR excludes implementation, services and often usage overages
• ARR is company defined and unaudited, so always check the definition

Whether you flag that ARR is self defined and unaudited. That is the point the interviewer is fishing for.

Upstream produces the commodity, so it is a direct price bet valued on net asset value and reserves. Midstream transports and stores it under long term fee based or take or pay contracts, so it is volume driven and infrastructure like, valued on EV/EBITDA and distributable cash flow. Downstream refines and markets, earning a crack spread, so it is margin driven and can actually improve as crude prices fall.

• Upstream is a direct price bet, valued on NAV and reserves
• Midstream is fee based and volume driven, contracted and infrastructure like
• Midstream supports higher leverage and is often judged on distributable cash flow
• Downstream earns the crack spread between crude and refined products
• Falling crude can widen downstream margins, so it partially hedges upstream

Whether you note downstream can benefit from falling crude. Candidates assume every part of energy moves the same way.

You take a cohort of existing customers and compare what they spend this year with what they spent last year, including upsell, cross sell and price increases as well as churn and downgrades. New customers are excluded entirely. It exceeds 100% when expansion inside the existing base outweighs the losses, which means the company can grow even if it never sells to anyone new.

• Same cohort, current period spend divided by prior period spend
• Includes expansion, upsell and price, net of churn and downgrade
• Excludes anything sold to newly acquired customers
• Above 100% means the installed base grows on its own
• Gross retention strips out expansion and can never exceed 100%

Whether you pair it with gross retention. A high net number quoted alone can hide a serious churn problem.

Contracted revenue comes from a long term agreement: a power purchase agreement, an availability payment, a take or pay contract, where price or volume is fixed for years. Merchant revenue is exposed to market price and demand. Contracted cash flow is bond like, so it takes a lower discount rate and supports more leverage. Merchant cash flow needs a higher discount rate and a far more conservative structure.

• Contracted: price or volume fixed under a long term agreement
• Merchant: fully exposed to market price and to demand
• Contracted cash flow is bond like, so lower discount rate and higher leverage
• Counterparty credit quality decides how bond like it really is
• Check the contracted share of revenue and how far the contracts run

Whether you tie contract quality to the discount rate and to leverage capacity. That link is the reason the question is asked.

Turns are cost of goods sold divided by average inventory, so how many times the stock sells through in a year. High turns usually mean fresh product, less markdown risk and less cash tied up. But too high can mean the retailer is running out of stock and losing sales, or clearing through heavy discounting. The right level is entirely category dependent: grocery turns many times faster than jewelry.

• Cost of goods sold divided by average inventory
• Higher turns mean less cash tied up and lower markdown risk
• Too high can signal stockouts and lost sales, or aggressive discounting
• Benchmark only within a category, since the right level varies enormously
• Read it alongside gross margin, since turns bought with markdowns are no win

Whether you say more is not automatically better. That reversal is the whole point of the question.

Trailing EBITDA is a single point on a cycle, so a multiple on it capitalizes either a peak or a trough. I would normalize: take a mid cycle margin averaged across a full cycle of seven to ten years, apply it to current revenue, and use a through cycle multiple. Otherwise you fall into the classic trap where a cyclical screens cheapest at the top and dearest at the bottom.

• Reported earnings reflect cycle position, not steady state economics
• Normalize using a mid cycle margin over a full seven to ten year cycle
• Apply a through cycle multiple, not the multiple prevailing today
• Cyclicals look cheap on peak earnings and expensive on trough earnings
• Cross check against replacement cost or price to book near the bottom

Whether you know a cyclical looks cheapest exactly when it is most dangerous. That inversion is the entire question.

When exclusivity on a drug ends, generics enter at a fraction of the price and the branded product typically loses most of its revenue within a year or two, often eighty to ninety percent for a small molecule. You model it as a step down from the loss of exclusivity date, not a gradual taper. It is why pharma cash flows are lumpy and why a smooth perpetuity growth rate can be badly wrong.

• Loss of exclusivity lets generics enter at far lower prices
• Small molecule revenue commonly falls eighty to ninety percent quickly
• Biologics erode more slowly, since biosimilars are harder to make and to switch
• Model a step down at the exclusivity date, not a gentle decline
• It breaks the perpetuity assumption, so terminal value needs real care

Whether you say it breaks terminal value. Applying a growing perpetuity to a company about to lose a third of its revenue is the classic error.