I wrote a guest blog piece for Company Check on 10 things to look out for during Due Diligence.
Company Check is a great resource for researching a company. They provide Companies House information (eg: statutory accounts, directors details) for free. If you are after a quick snapshot of a business they also present key financial information with some nice charts.
Below are some excerpts but you can see the full article here.
1. Cash conversion
Ultimately the true value of a business lies in the future cash flows. If a company is presenting accounts showing a significant variation between the level of EBITDA (Earnings before interest tax, depreciation and amortization) and operating cash flow before capital expenditure then further investigation is required into just where that cash is going.
4. Changes in accounting policy
Changes in accounting policy tend to artificially impact the level of profits a company generates. For example, when a customer pays annually in advance for a service a company may be able to recognize the sale on receipt of the cash or instead recognize one twelfth of the sale each month for the duration of the contract. Switching from the latter to the former in the year prior to sale will make it appear that there has been strong sales (and profit) growth when in reality there may have been no change to the underlying business.
7. Depreciation vs Capital Expenditure
Depreciation aims to spread the cost of an asset over its useful life. An established business will be finding that as the life of an asset comes to an end it requires replacement. The cost of this replacement can be found in the capital expenditure line of a cash flow statement. If capital expenditure is significantly less than the depreciation expense it suggests the maintenance of assets is being neglected and may require big future payments.
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