DUE DILIGENCE

The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions.

For fundamental analysis a reasonable investigation focusing on material historical and future matters via the principles of valuation and shareholder value analysis including recent and previous periods Balance Sheet, Income Statement, Cash Flow Statement and Key statistical ratio analysis.

Keeping it simple for the “non-accountant/finance” audience, focus on the following key areas:

News

Review past 12 months of headlines that impact the financial position of the company.  Review Yahoo message board for “Material” posts. ( don’t laugh, occasionally there is overlooked info)

Income Statement

Review every component in comparison to previous quarters and years for significant growth and disparities for example R&D, non-recurring, discontinued operations and extraordinary items.

Balance Sheets

Review every component in comparison to previous quarters and years for significant growth and disparities for example cash, inventories, plant and equipment, goodwill, intangible assets, and other assets.  Important to note if goodwill and intangibles represent a significant portion of total assets since they have no value in liquidation.  Focus on changes in long term debt, deferred liabilities and retained earnings.

Cash Flows

Look for both positive Operational and Free cash flow for liquidity

 Ratios

Trailing P/E
Forward P/E
Price/Book
ROA (ttm)
ROE (ttm)
Quarterly Revenue Growth (yoy)
EPS (ttm)
Quarterly Earnings growth (yoy)
Total Debt/Equity (mrq)
Current Ratio (mrq)
Book Value per share (mrq)

Notes:

Trailing twelve months (ttm)
Year over year (yoy)
Most recent quarter (mrq)