Finance Foundations: Core Terms Every Student Must Know
Finance interviews often move fast: the interviewer expects you to recognize a term, state the formula, explain what it measures, and connect it to a real business example. This reference builds that instant recall across valuation, returns, risk, banking, mutual funds, bonds, and leverage. The goal is not to memorize isolated definitions, but to understand where each metric fits and how to use it in an interview answer.
- EBITDA means Earnings Before Interest, Tax, Depreciation and Amortization, and is used as a proxy for operating cash flow.
- PAT means Profit After Tax and is the profit that flows to shareholders, so it matters directly for EPS and equity valuation.
- Valuation multiples such as P/E, P/B and EV/EBITDA compare market value with earnings, book value or operating profit.
- Return ratios such as ROE, ROA and ROCE test how efficiently a company uses equity, assets or capital employed.
- Banking metrics such as NPA, CASA and NIM explain asset quality, deposit strength and lending profitability.
- Risk and fund terms such as Beta, Alpha, NAV and AUM help explain mutual funds, market risk and fund manager performance.
- EBITDA vs PAT is context-dependent: EBITDA helps cross-company comparison, while PAT is what finally reaches shareholders.
Think of finance terminology as a toolkit. Some terms explain operating performance, some value a company, some measure returns, and others are specific to banks, bonds or funds.
How to Read Any Finance Term in an Interview
For interview prep, every finance term should be learned in the same structure: definition, formula, interpretation, example and limitation. A candidate who only states a formula may sound memorized; a candidate who explains what the number means sounds finance-ready.
For example, saying "ROE is Net Profit divided by shareholders' equity" is correct but incomplete. A stronger answer adds that Return on Equity measures how effectively a company generates profit from shareholder capital, and that HDFC Bank ROE is around 17%, with a target above 15% considered quality in the source reference.
Define the term, state the formula, explain what a higher or lower value usually means, give the Indian example from memory, and mention one limitation or context.
Profitability and Operating Performance
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization. Its formula is EBIT plus depreciation and amortization, and it is often used as a proxy for operating cash flow because it strips out financing cost, tax impact and non-cash accounting charges.
In interviews, EBITDA is especially important because it helps compare companies before the effect of capital structure. Reliance Retail EBITDA for FY24 is approximately ₹22,000 Cr, which gives a concrete Indian reference point for discussing operating scale.
EPS, or Earnings Per Share, is calculated as net profit divided by the number of shares outstanding. It converts total profit into a per-share number, which is why it connects directly to equity valuation and target price thinking. TCS EPS for FY24 is approximately ₹120 per share.
The key nuance is that EBITDA and EPS do not answer the same question. EBITDA explains operating profit before financing and accounting effects, while EPS reflects the shareholder-level earnings after costs that affect PAT.
Valuation Multiples: P/E, P/B and EV/EBITDA
P/E Ratio, or Price-to-Earnings Ratio, is calculated as market price divided by EPS. It shows how much the market is paying for each rupee of earnings. The Nifty 50 trailing P/E is approximately 22-24x historically in the source reference.
P/B Ratio, or Price-to-Book Ratio, is calculated as market price divided by book value per share. It is especially relevant for banks because book value is closely linked to the balance sheet and capital base. HDFC Bank P/B is approximately 3.5x, and banks are valued on P/B in the source reference.
EV/EBITDA means Enterprise Value to EBITDA. Enterprise Value equals market capitalization plus net debt, and the ratio is a key valuation metric in mergers and acquisitions, often shortened as M&A. Industrials and manufacturing companies are typically valued at 8-12x EV/EBITDA in the source reference.
P/E asks what investors pay for earnings, P/B asks what they pay for book value, and EV/EBITDA asks what buyers pay for operating profit before financing and non-cash charges.
Return Ratios: ROE, ROA and ROCE
ROE, or Return on Equity, is calculated as Net Profit divided by Shareholders' Equity multiplied by 100. It measures profit generated on shareholder capital. HDFC Bank ROE is approximately 17%, and the source reference states that above 15% is a quality target.
ROA, or Return on Assets, is calculated as Net Profit divided by Total Assets multiplied by 100. It is especially important for banks because banks carry large asset bases in the form of loans and investments. Banks target ROA above 1%, while HDFC Bank ROA is approximately 2%.
ROCE, or Return on Capital Employed, is calculated as EBIT divided by Total Assets minus Current Liabilities. It focuses on operating profit relative to capital employed. Asian Paints ROCE is approximately 30%+, with the source describing it as an asset-light leader.
The practical mistake is to treat all return ratios as interchangeable. They are related, but each uses a different denominator: equity, assets or capital employed. In an interview, choose the ratio based on the business model and what you are trying to evaluate.
Cost of Capital and Market Risk
WACC, or Weighted Average Cost of Capital, combines the cost of equity and after-tax cost of debt according to the capital structure. The formula is Ke×(E/V) + Kd×(1-T)×(D/V), where equity and debt weights reflect total value. Typical Indian mid-cap WACC is 12-15% in the source reference.
Beta, written as β, measures systematic risk using Cov(stock, market) divided by Var(market). A lower beta usually signals lower sensitivity to market movement, while a higher beta signals greater sensitivity. The source notes IT sector β around 0.7 as defensive, and PSU banks β around 1.2.
Alpha, written as α, is excess return over the benchmark. It is calculated as Actual Return minus CAPM Expected Return, where CAPM means Capital Asset Pricing Model, a model used to estimate expected return based on market risk. Active fund α above 0 means the fund manager added value.
Mutual Fund Terms: NAV and AUM
NAV, or Net Asset Value, is used for mutual funds and is calculated as Total Assets minus Liabilities divided by Units. It represents the per-unit value of the fund. HDFC Equity Fund NAV is recalculated daily by the asset management company, or AMC.
AUM, or Assets Under Management, is the total market value of assets managed. It shows the scale of money managed by a fund house, scheme or industry. Indian mutual fund industry AUM is ₹65+ Lakh Cr in 2024 in the source reference.
A common nuance is that NAV is a per-unit value, while AUM is a total scale number. A fund can have a high AUM without that automatically saying it has generated alpha; performance must still be judged against the benchmark and expected return.
Banking Metrics: NPA, CASA and NIM
NPA, or Non-Performing Asset, is a stressed loan where payment is overdue for more than 90 days. In banking interviews, it is a key asset-quality term. SBI GNPA is approximately 2.24% for FY24, with the source reference noting an improving trend.
CASA means Current Account plus Savings Account. These are low-cost deposits, and the ratio is important for bank profitability because lower funding cost supports lending spreads. HDFC Bank CASA ratio is approximately 38%, while Kotak is approximately 50%.
NIM, or Net Interest Margin, is calculated as Interest Income minus Interest Expense divided by Average Earning Assets. It captures the spread a bank earns on lending and investments after funding cost. Private banks have NIM of 3.5-4.5%, while public sector banks, or PSBs, have 2.5-3% in the source reference.
These three terms work together in bank analysis. NPA shows loan stress, CASA shows deposit strength, and NIM shows lending profitability. Interviewers often test whether candidates can connect all three instead of defining them separately.
Debt Market and Leverage Terms
Yield is annual income divided by price. For bonds, it can be understood as coupon divided by price, while for equity it can be dividend divided by price. The source reference gives the 10Y G-Sec yield at approximately 7% and AT1 bond yield at 8-9%.
Duration measures the interest rate sensitivity of a bond. It is the weighted average time to receive cash flows. A 15Y G-Sec duration is approximately 9-10 years, and a 1bp rate increase leads to approximately 0.1% price fall in the source reference.
Spread is the yield difference between two instruments, such as corporate bond yield minus G-Sec yield. The AAA corporate spread over G-Sec is 40-60bps, where bps means basis points. D/E Ratio, or Debt-to-Equity Ratio, is total debt divided by shareholders' equity and measures leverage.
The nuance is that debt terms are sensitive to instrument type and business model. A capital-heavy infrastructure company may carry D/E of 2-3x, while IT companies may have debt near zero, so the same leverage number should not be judged without context.
Worked Example: EBITDA vs PAT
Consider the interview question: "Which is better - high EBITDA or high PAT?" A strong answer does not pick one blindly. It explains the situation, the metric purpose, and the decision context.
This is one of the most important distinctions in finance interviews because it separates formula recall from judgment. EBITDA helps compare companies before financing and tax differences, while PAT captures the final profit available to shareholders.
EBITDA is best for operating comparison and M&A valuation, while PAT is best for shareholder earnings, EPS and equity research target-price thinking.
Conclusion
Finance foundations are about fluent interpretation, not just memorization. If you can define the term, state the formula, link it to the right use case and support it with an Indian example, you can handle most first-round finance interview questions with clarity.
The most frequent error is saying EBITDA is always better than PAT because it is higher. That costs points because EBITDA ignores interest, tax, depreciation and amortization, while PAT is what flows to shareholders. Always answer based on context: M&A and cross-company comparison usually favor EBITDA, while equity research and EPS analysis depend on PAT.