Due diligence is an analysis method related to stocks, bonds, real estate, as well as investment. This article delivers key steps for individual investors taking due diligence.
First, as an individual investor, you should analyze the capitalization of the company. The total value or market capitalization of a company covers a few things. Indicating stock price volatility, the broad ownership and potential market are the examples.
Second, always monitor trends on a company’s revenue, operating expenses, profit margins, as well as return on equity. The key action is analyzing profit margin over several years or quarters. Then, compare the result to companies in the same industry to decide best.
Third, what individual investors must do next after scaling the company is to know who are the competitors in the industry. Due diligence covers the comparison on profit margins with three or two of its competitors. This also involves further scrutiny in whether or not the industry is leading in the sector.
Fourth, use the most useful metrics.
Ratios like price-to-earning (P/E) ratio, the price/earnings to growth (PEGs) ratio, and price-to-sales (P/S) ratio are useful. Yahoo Finance has provided this calculation.
Fifth, it is important to recognize the industry’s level of expertise and experience. The individual investors could start with the question on whether or not the company is founder-led. Knowing the company’s management could help to determine the company’s management maturity.
Sixth, it is vital to check the company’s debt. Then, compare the debt with other industries. Every industry has debt, the task is not only knowing how much the debt is but making sure that the rating comes from the rating agency.
Seventh, investors should know whether the stock is volatile. It is important to know the company’s planning on issuing more shares as well. Finally, investors must recognize both long-term and short-term risks.
