When making a financial investment, whether it be in real estate or a company’s stocks, you need to know that it is a good investment. Investment due diligence is the process of investigating the potential investment’srisk and security before investing.
Both, companies looking to acquire other companies and individuals who want to invest in businesses, should carry out investment due diligence. When done right, and by following certain guidelines, investment due diligence could vastly improve investment strategy. By weeding out the bad investments and retaining only the good ones, the chances for making a profit increases.
How does investment due diligence affect your investment strategy?
The aim of every investment is to make a profit. While a stock might look like a good investment at present, a little digging might reveal that the present high is a one-time occurrence. If a stock does not rise consistency and mostly drops or fluctuates widely, it is probably too volatile and best not to invest in it. Similarly, an investment opportunity might be dressed to look attractive, or might just be an temporary uptrend. On the other hand, one may just underestimate a potential investment opportunity- after all, many established businesses today were not expected to be so a few years back.
By reviewing certain characters of an investment, you can decide if it matches your investment strategy and expectations or not. When you do this with every investment, you eventually build an investment portfolio that are more likely to do well overall.
What you should look out for when conducting investment due diligence
1. The total value of the company: In business due diligence, you can learn a lot by analysing the size and value of the company. Larger companies tend to be more stable with a broader and diverse set of investors than mid-size and smaller companies.
2. The company trends: You will know that the company is a good investment if it regularly shows positive market trends. The company does not need to show high profits at all times, but more importantly, consistent growth. To get a better idea of the company’s performance in the markets, you should investigate the company’s performance over the last two years.
3. Valuation: Due diligence to gather information about key factors like the price to earnings ratio, price to growth ratio and price to sales ratio will allow you to understand what to expect from the company. You can also learn how well the company performs against its competitors.
4. Liabilities: Just like you would investigate a company’s assets and profit margins, you also need to take a closer look at its liabilities. Due diligence is required to check if the assets outweigh the liabilities or if there is a chance of the latter pulling the company down with time.
5. Risks: There are long-term risks and short-term risks when making any investment. Risks can affect the company as a single entity or they can affect the industry as a whole. Investment due diligence requires you to analyse how well a company would stand up in both cases. Could a bad company policy bring losses? Or could a competitor put the company out of business? Business due diligence will have you investigating all these angles.
6. External Factors: External Factors like competition, industry trends, market scenario etc. can impact business and investments. A dipstick analysis can help you make informed decisions.
When taking all these factors into account, the benefits of investment due diligence can clearly be seen. Although it might take a little time and effort, in the long run, investment due diligence and business due diligence could save a lot of money.
Not only do investors benefit from investment due diligence but as a side effect, companies do too. Under the knowledge that they are being investigated by potential investors, companies strive to bring their A-game to the table at all times. Companies engaging in business due diligence of themselves can help to keep their growth on a positive trend.