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Due Diligence is a survey to confirm whether it is really good for investment or M&A.
For individual investors, it is easy to reduce the risk that is easily overlooked by looking at three aspects of financial, business, legal and governance, even if it is not a big investigation as a corporate acquisition.
The important thing is to make it possible to explain what the company earns, what kind of risk, and what business can continue in the future.
First Con まず
Due diligence is a pre-investigation process.
In terms of stock investment, it is to examine why this company is making profits, whether it is impossible to financially, or whether there is a risk of overlooking it.
The basics to be considered as an individual investor are:
| 視点 | Check |
|---|---|
| Financial DD | Sales, profit, loan, cash flow |
| Business DD | Business, Market, Competitiveness, Customer Dependence |
| Legal & Governance DD | Litigation, Regulatory, Contract, and Management System |
You don’t have to examine everything at a professional level.
However, it is important to avoid the minimum "buy without knowing" status.
About Due Diligence
Due diligence is a word from Due Diligence in English and is translated as “Appropriate Evaluation Procedure” in Japanese.
M&A is used to confirm the financial, business, legal and tax of the target company before acquisition.
In the context of investment, it is easy to understand that it is more widely considered as a "indispensable investigation before investment decisions".
For example, the following checks are due diligence:
- View sales and profit trends in financial statements
- Check borrowings and capital ratios
- Find dependencies for key customers
- See if your business is in a growing market
- Check whether there is a litigation, regulation or compliance issue
In other words, due diligence is not only the reason for investing, but also the reason for not investing.
Why important?
Due diligence is important because there is a risk that you do not know only the number on the surface.
For example, if a company with increased profit is a temporary special profit, it will not be continued after next term.
Even if sales are growing, if the dependency of one major customer is large, it is possible that the business performance will worsen by the decrease in transaction with the customer.
| View on the surface | What to check |
|---|---|
| Inc ing profit | Business profit or temporary profit |
| Increased sales | price rise, quantity increase or acquisition effect? |
| Financials Look Sound | Is there any risk of borrowing, security, or even debt? |
| Growing market | the competition is intense and the profit rate is low |
The most important thing is finding good materials.
It is easy to avoid excessive expectations and thoughts by checking where the bad material is.
Financial DD Points
Financial DD checks the company's money flow.
Beginners are easy to organize by looking at the following five:
| 項目 | See Meaning |
|---|---|
| Sales | Is the business scale extended? |
| Operating income | Is it profitable in the business? |
| Profit | How much profit can be left on sales? |
| Payment | Is it impossible to financially |
| Cash Flow | Is cash actually earned? |
The difference between profit and cash flow.
If there is no profit on the accounting, the receivable is too much and there is no cash in the accounting, it is necessary to pay attention.
In addition, in companies with high borrowings, the burden may increase if the interest rate rise and business performance worsen.
Business DD
Business DD confirms whether the company’s business continues.
The following points are:
- What companies are earning?
- Is the market growing?
- What are the strengths compared to ?
- って customers or business partners are partial
- Will the demand remain even if the value is raised
For example, risk changes depending on whether the revenue source is software usage fee, semiconductor manufacturing equipment, or data center equipment.
Even if the market is growing, if the market is competitive, the profit may be difficult even if sales increase.
Therefore, it is necessary to see how to earn by company as well as the popularity of the theme.
Legal and Governance DD
Legal and Governance DD checks the risk of preventing business co ity.
It is difficult for individual investors to conduct professional legal investigations, but there is a possibility that it can be confirmed by public information.
| 項目 | Example |
|---|---|
| Litigation and Siciency | Past Disclosure, News, and Timely Disclosure |
| Regulatory risk | Industry license, administrative disposal, system change |
| Contract risk | Dependence on major business partners and long-term contracts |
| Management System | Management, Capital Policy, and Shareholder Return Policy |
In particular, companies with large regulatory, financial, medical, infrastructure, and overseas expansion may directly link to business results.
Legal and Governance DD is a point of view to understand that investment decisions may change at a different risk even if the number of financial results is good.
Simple checklist for individual investors
First, let’s check whether you can answer the following questions:
| 質問 | Search |
|---|---|
| What does this company earn? | Financial Statements, Securities Reports, Corporate Sites |
| Is sales and profit growing? | Consolidated Financial Results |
| Is profit from the main business? | Operating income, special profit, business CF |
| Is the debt not heavy? | Balance sheet, ity ratio |
| Can you explain the reason for growth? | Market Environment, Competitive Advantage, Company Plan |
| What if you fail | Risk, Conflict, Regulation, and S ation |
If the answer is filled with this check, it is safer to continue the investigation rather than rushing investment.
Common failures
Failure to occur due diligence is as follows:
- Buy only on social media topics
- I think it is safe because it is a famous company
- Determine dividend yield only
- Buy without finding out why stock prices fall
- Look at growth and see profit and financial
Especially in high dividends, it is necessary to check the reason why the yield is high.
If you are only looking at a higher yield due to a lower share price, you may have a risk of business performance deterioration or reduction.
Due diligence is a survey to check risks before investment.
Individual investors will be able to increase the quality of investment decisions by simply conscious of three aspects: financial DD, business DD, legal and governance DD.
What is important is not to aim for perfect analysis.
It is to check whether you can explain what to earn, why to grow, and where to fail.
I don’t buy any investments that I can’t understand.
This is the most practical due diligence for individual investors.
出典
- Investor.gov "Research Before You Invest": https://www.investor.gov/research-you-invest
- Investor.gov "Five Questions to Ask Before You Invest": https://www.investor.gov/index.php/introduction-investing/getting-started/five-questions-ask-you-invest