Financial Due Diligence -Part 2

Fundamental Analysis talks about the numbers.

Happy New Month. It feels good to be back. The last few weeks have been crazy yet amazing. I can’t wait to give you the full gist.

Let’s go back to the subject matter. How do you conduct due diligence on your investment and savings? Today, let’s talk about the Fundamentals. Fundamentals here refer to the evaluation of the company’s performance and position relative to its industry peers, the macro economy, or the business itself.

It involves digging deep into the numbers to extract its growth potential and current and past performances.  You don’t need to be an accountant or a financial analyst before you can understand some of these trends and metrics.

How many of you will invest in a printing press company? Let me assume you won’t because the days of physical copies are largely behind us. You will likely invest in a tech business. There are two ways to look at Fundamentals: either you start from the macro to the micro or vice-versa.

Macro-Micro Analysis: If you are an investor that cares about your money, you will care about the environment you want to invest your money. Most people think passive investors are folks that just leave their money somewhere to grow while they are asleep. Passive investors care about the things that can affect their passive investment. I can’t count the number of times I have seen people cry on social media because their investment is now worth half of the funds they invested with. The truth is you must understand the terrain of the economy you want to invest in. What’s the average growth? What drives or contributes the largest to the GDP? What is the focus of government? How easily does macro-economy affect the business? What other business provides the same service or goods? What are the policies surrounding this industry? If the real estate industry is growing at 4%, you should not expect an ROI greater than 4%. A good number of failed investments would have been avoided if we had a good understanding of the business environment

Micro- Macro Analysis: What’s the company revenue? Let them explain to you like a child how the business makes money. It is too good to be true if they can't explain. Also, don’t be in a rush for opportunities. Otedola might have made money via oil, but Elon Musk did not. Warren buffet makes money via Elumelu via business acquisitions and mergers. Don’t let anyone pressure you into investment. There will always be something to invest in (I am not asking you to delay unnecessarily when there is clarity).

Photo by micheile dot com on Unsplash

Ask for the business margins (Gross, operating, profit). Remember, every business pays its investors last. You’re the investor! A company that is not making profit won’t pay its investors. (Read that again). So, if the profit margin is zero, it signifies two things 1. The business is living on debt 2. The business is living on shareholders’ funds. Both are worrisome but the former can affect the business going concern.

Never forget this, cash is king. A loss-making business with cash is better than a profitable company without cash. The best is to be profitable with cash. Always ask what is funding their working capital: sales, shareholders fund, or debt? As an investor, “how” must never leave your mouth.

I am going to write to you for the next 5 days and then take a break for two weeks.

Have you heard about the recent financial crisis in Ghana, I can’t wait to gist you about it. However, let’s talk about technical analysis tomorrow.

Cheers to a profitable lifestyle,

TL.