Due Diligence Fundamentals
Expert-defined terms from the Certified Professional in Due Diligence Process course at London School of Business and Administration. Free to read, free to share, paired with a professional course.
Account Analysis #
Account analysis is the process of examining and evaluating a company's financial statements and accounts to identify trends, risks, and opportunities. This involves reviewing financial statements, such as the balance sheet, income statement, and cash flow statement, to understand a company's financial position, performance, and cash flows.
Accounting Standards #
Accounting standards refer to the rules and guidelines that govern the preparation of financial statements. These standards ensure that financial statements are presented in a consistent and comparable manner, allowing users to make informed decisions. Examples of accounting standards include Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
Acquisition #
An acquisition is the process of one company purchasing or taking control of another company. This can involve the purchase of assets, stocks, or bonds, and can be used to expand a company's operations, increase market share, or gain access to new technologies or markets.
Asset #
Based Lending: Asset-based lending is a type of lending that involves using a company's assets as collateral for a loan. This can include inventory, property, equipment, or other assets that can be used to secure the loan.
Audit Committee #
An audit committee is a group of independent directors responsible for overseeing a company's auditing and accounting practices. This includes ensuring that financial statements are accurate and reliable, and that internal controls are in place to prevent fraud or errors.
Auditor #
An auditor is an independent professional responsible for examining and evaluating a company's financial statements and accounting practices. This includes ensuring that financial statements are presented in a fair and accurate manner, and that internal controls are in place to prevent fraud or errors.
Balance Sheet #
A balance sheet is a financial statement that presents a company's financial position at a specific point in time. This includes assets, liabilities, and equity, and provides a snapshot of a company's financial health and stability.
Bankruptcy #
Bankruptcy is a legal process that involves a company being unable to pay its debts and obligations. This can result in the company being liquidated or restructured, and can have significant consequences for creditors and stakeholders.
Business Plan #
A business plan is a document that outlines a company's goals, objectives, and strategies for achieving success. This includes market analysis, financial projections, and operational plans, and provides a roadmap for a company's growth and development.
Capital Structure #
Capital structure refers to the mix of debt and equity that a company uses to finance its operations. This includes bonds, stocks, and other securities, and can have a significant impact on a company's cost of capital and financial health.
Cash Flow Statement #
A cash flow statement is a financial statement that presents a company's inflows and outflows of cash over a specific period of time. This includes operating, investing, and financing activities, and provides insight into a company's liquidity and solvency.
Certified Public Accountant (CPA) #
A Certified Public Accountant (CPA) is a professional designation that requires a high level of education and experience in accounting and finance. CPAs are responsible for preparing and auditing financial statements, and providing tax and consulting services to individuals and businesses.
Compliance #
Compliance refers to the process of ensuring that a company is in accordance with relevant laws and regulations. This includes tax laws, securities laws, and other regulatory requirements, and can have a significant impact on a company's reputation and financial health.
Corporate Governance #
Corporate governance refers to the system of rules and practices that govern a company's behavior and decision-making. This includes board of directors, executive management, and shareholder rights, and can have a significant impact on a company's performance and reputation.
Credit Rating #
A credit rating is an evaluation of a company's creditworthiness and ability to repay its debts. This includes assessing a company's financial health, management team, and industry trends, and can have a significant impact on a company's cost of capital and access to credit.
Due Diligence #
Due diligence is the process of investigating and evaluating a company's financial and operational performance before making an investment or acquisition. This includes reviewing financial statements, assessing management team, and evaluating industry trends and risks.
Earnings Before Interest and Taxes (EBIT) #
Earnings Before Interest and Taxes (EBIT) is a measure of a company's profitability that excludes interest and taxes. This provides insight into a company's operating performance and ability to generate cash flows.
Financial Analysis #
Financial analysis is the process of evaluating and interpreting a company's financial statements to understand its financial health and performance. This includes ratio analysis, trend analysis, and industry comparison, and provides insight into a company's strengths and weaknesses.
Financial Modeling #
Financial modeling is the process of creating a mathematical representation of a company's financial performance to forecast its future results. This includes building financial statements, estimating revenues and expenses, and evaluating different scenarios and sensitivities.
Financial Reporting #
Financial reporting refers to the process of preparing and presenting financial statements to stakeholders, including investors, creditors, and regulators. This includes complying with relevant laws and regulations, and providing transparent and accurate information about a company's financial performance.
Financial Statement Analysis #
Financial statement analysis is the process of evaluating and interpreting a company's financial statements to understand its financial health and performance.
Forecasting #
Forecasting is the process of predicting a company's future financial performance based on historical trends and indicators. This includes estimating revenues and expenses, and evaluating different scenarios and sensitivities.
Generally Accepted Accounting Principles (GAAP) #
Generally Accepted Accounting Principles (GAAP) are a set of rules and guidelines that govern the preparation of financial statements. These principles ensure that financial statements are presented in a consistent and comparable manner, allowing users to make informed decisions.
Initial Public Offering (IPO) #
An initial public offering (IPO) is the process of a company issuing stocks or bonds to the public for the first time. This can provide a company with capital to finance its operations, and can also provide liquidity to shareholders.
Internal Control #
Internal control refers to the policies and procedures that a company has in place to ensure the accuracy and reliability of its financial statements. This includes segregation of duties, authorization and approval of transactions, and reconciliation of accounts.
International Financial Reporting Standards (IFRS) #
International Financial Reporting Standards (IFRS) are a set of rules and guidelines that govern the preparation of financial statements. These standards ensure that financial statements are presented in a consistent and comparable manner, allowing users to make informed decisions.
Investment Banking #
Investment banking refers to the activities of a bank or financial institution that involve advising clients on mergers and acquisitions, raising capital, and trading stocks and bonds.
Leverage #
Leverage refers to the use of debt to finance a company's operations or investments. This can increase a company's returns on equity, but can also increase its risk of default or bankruptcy.
Liquidity #
Liquidity refers to a company's ability to meet its short-term obligations as they come due. This includes cash and cash equivalents, and provides insight into a company's ability to pay its bills and expenses.
Management Discussion and Analysis (MD&A) #
Management Discussion and Analysis (MD&A) is a section of a company's annual report that provides management's perspective on the company's financial performance and operations. This includes discussing trends and challenges, and outlining strategies and initiatives.
Mergers and Acquisitions #
Mergers and acquisitions refer to the process of one company combining with another company. This can involve the purchase of assets, stocks, or bonds, and can be used to expand a company's operations, increase market share, or gain access to new technologies or markets.
Net Present Value (NPV) #
Net Present Value (NPV) is a measure of the present value of a series of cash flows. This involves discounting future cash flows to their present value, and provides insight into the value of an investment or project.
Operational Risk #
Operational risk refers to the risk of loss or damage to a company's operations or reputation. This includes risks related to people, processes, and systems, and can have a significant impact on a company's financial performance and reputation.
Return on Equity (ROE) #
Return on Equity (ROE) is a measure of a company's profitability that is calculated by dividing net income by total equity. This provides insight into a company's ability to generate returns on equity, and can be used to evaluate a company's financial performance.
Return on Investment (ROI) #
Return on Investment (ROI) is a measure of the return on an investment that is calculated by dividing gain by cost. This provides insight into the value of an investment or project, and can be used to evaluate a company's financial performance.
Risk Management #
Risk management refers to the process of identifying, assessing, and mitigating risks that could impact a company's financial performance or reputation. This includes strategies such as diversification, hedging, and insurance, and can help a company to minimize its exposure to risk.
Securities and Exchange Commission (SEC) #
The Securities and Exchange Commission (SEC) is a regulatory agency that is responsible for overseeing the securities industry and enforcing securities laws. This includes registering securities, reviewing financial statements, and investigating fraud and other violations.
Stakeholder #
A stakeholder is an individual or group that has an interest in a company's operations or financial performance. This includes shareholders, creditors, employees, and customers, and can have a significant impact on a company's reputation and financial health.
Strategic Planning #
Strategic planning refers to the process of developing and implementing a company's long-term goals and objectives. This includes analyzing markets and competitors, identifying opportunities and threats, and developing strategies and initiatives to achieve success.
Swot Analysis #
Swot analysis is a technique used to identify and evaluate a company's strengths, weaknesses, opportunities, and threats. This provides insight into a company's position and prospects, and can be used to develop strategies and initiatives to achieve success.
Time Value of Money #
Time value of money refers to the concept that a dollar today is worth more than a dollar in the future. This is because money can be invested to earn interest or returns, and can be used to evaluate the value of an investment or project.
Valuation #
Valuation refers to the process of determining the value of a company or asset. This includes methods such as discounted cash, comparable companies, and asset based valuation, and can be used to evaluate the value of an investment or project.
Working Capital #
Working capital refers to a company's short-term assets and liabilities. This includes cash and cash equivalents, accounts receivable, and inventory, and provides insight into a company's ability to meet its short-term obligations.
Yield #
Yield refers to the return on an investment or security that is calculated by dividing income by price. This provides insight into the value of an investment or security, and can be used to evaluate the performance of a portfolio or investment strategy.