Capital Budgeting Techniques

How to Do Financial Due Diligence Before Selecting Stocks? Stock picking isn’t just about looking at charts and following trends—it’s about understanding the financial health of a company. Before investing, a structured Financial Due Diligence (FDD) process can help you avoid bad bets and spot strong opportunities. Here’s a framework to follow: 1. Understand the Business Model & Industry - What does the company do? - Who are its competitors? - Is it in a growing or declining industry? 2. Analyze the Financial Statements - Income Statement (Profit & Loss) – Revenue growth, profitability (Gross, Operating, Net Margins), EPS trends - Balance Sheet – Debt levels, cash reserves, working capital position - Cash Flow Statement – Operating cash flow vs. net income, free cash flow trends 3. Check Key Financial Ratios - Profitability: ROE, ROA, Gross & Operating Margins - Liquidity: Current Ratio, Quick Ratio - Leverage: Debt-to-Equity, Interest Coverage - Valuation: P/E Ratio, P/B Ratio, EV/EBITDA 4. Assess Management & Governance - Background & track record of leadership - Insider buying/selling trends - Transparency in disclosures & corporate governance 5. Review Competitive Position & Moat - Does the company have a sustainable competitive advantage (brand, network effect, patents, cost advantage)? 6. Industry Trends & Macroeconomic Factors - Economic cycles, inflation, interest rates - Global supply chain, geopolitical risks - Market trends affecting revenue streams 7. Cross-Check with Analyst Reports & News - Read Equity Research Reports, Investor Presentations, Credit Reports - Stay updated on company news, regulatory changes 8. Look at Historical Performance & Future Guidance - Compare past financials vs. projections - Evaluate management’s growth expectations 9. Risk Assessment & Downside Protection - What’s the worst-case scenario? - How resilient is the business in a downturn? 10. Compare with Peers & Make an Informed Decision No company operates in isolation—compare financials and valuations with competitors before buying. Smart investing is about discipline, not hype. By doing thorough due diligence, you increase your chances of picking winners while avoiding pitfalls. What’s your go-to method for analyzing stocks? Let’s discuss.

I was invited to speak to the Chief Sustainability Officer group at the World Economic Forum during climate Week. I urged us all to take control of the narrative. Here is a summary... Let’s shift the narrative. As sustainability leaders… Let’s not talk about decarbonization as emissions. Let’s talk about it as innovation that drives: ·    energy cost savings, ·    avoidance of energy pricing volatility ·    avoidance of carbon fees ·    reduced maintenance ·    increased productivity ·    sales lift Let’s not talk about tons of waste diverted from landfill and reused, let’s talk about it as innovation that reduces: ·    virgin input costs ·    waste disposal costs ·    exposure to geopolitical risk in supply chains ·    exposure to tariffs (e.g. Renault is putting 45% of used car components into new cars) Our research into the Return on Sustainability Investment (ROSI) shows that sustainability is just good management.   The methodology (developed with companies) has found nine value drivers associated with sustainability, including operational efficiency, risk reduction, employee retention and productivity, sales and marketing, and and innovation and growth. For example, innovation is about identifying a problem or an opportunity. It can be focused on process, product or service. It can be incremental or transformative. From a sustainability perspective, innovations fall into two broad buckets:  ·    innovating sustainability improvements in an industry or a category ·    innovating with a process, product or service that is needed by society. The first approach requires understanding the material ESG issues for the sector and designing solutions that tackle that issue, while also improving the underlying value proposition - -which sustainability can do. The second approach is tougher, but has more potential to go big: Innovating to solve broad societal problems such as water scarcity, plastic packaging pollution and health impacts, tackling the carbon transition, social inequity and so on. Here we might look at innovation such as 3D printing (e.g. on demand) using recycled inputs – tires, dresses, construction materials etc. We might look at bio-based plastic made from air and methane-based greenhouse gas dissolved in saltwater, recyclable through biological digestion. We might look at how to give immigrants and others with no credit history access to credit through tracking ontime rental payments. So as you work with your companies, help them understand that managing the material ESG issues for their sector and company is not a reporting and compliance exercise. It is a good management exercise that can drive everything from operational efficiency to sales and customer loyalty to innovation that will help the bottomline. Put in place methods such as ROSI with your finance team or ESG controller to track the financial benefits so you can get sustainability to the speed and scale you and the planet want and need. 

𝐉𝐮𝐬𝐭 𝐭𝐮𝐫𝐧𝐞𝐝 𝐚 𝐦𝐚𝐫𝐤𝐞𝐭 𝐡𝐢𝐜𝐜𝐮𝐩 𝐢𝐧𝐭𝐨 𝐚 $70𝐌 𝐰𝐢𝐧 𝐟𝐨𝐫 𝐚 𝐏𝐄 𝐜𝐥𝐢𝐞𝐧𝐭. 𝐇𝐞𝐫𝐞'𝐬 𝐡𝐨𝐰. Last year I got a call from a megafund I've advised before. "Market's gone nuts with these rate hikes. We think there's opportunity." Understatement of the year. Their portfolio company was rock-solid – $500M enterprise value, performing above plan despite macro chaos. But the company's fixed-rate debt was getting hammered, trading at 80 cents on the dollar. Pure market mechanics, nothing fundamental. Most firms would shrug. "Interesting, but so what?" I spotted something different. The fund owned 100% of the equity but ZERO of the debt. Classic artificial separation between capital structure components that only exists because most investors lack either imagination or control positions. Sometimes both. 𝐌𝐲 𝐬𝐭𝐫𝐚𝐭𝐞𝐠𝐲: Buy up a chunk of the debt at the depressed price while maintaining complete equity control. Not just a trade, but a fundamentally transformative move that: [1] Instantly transferred value from selling debt holders to our equity position (market dislocation arbitrage) [2] Reduced change-of-control repayment risk on exit (structural enhancement) [3] Created multiple new strategic exit paths (optionality creation) The math was compelling: $6M direct gain from buying $30M debt at $24M, plus another $42M from enhanced exit value due to simplified structure and reduced transaction risk. They executed immediately. Initial 10% debt repurchase, followed by another 15% over six months. Total position up $70M in value. Here's the kicker – most advisors would've calculated the discount to par and stopped there. Basic arithmetic. I showed how this maneuver fundamentally altered their strategic position in ways potential buyers would pay real money for. When you control both sides of the table, you dictate the rules of engagement. Why share this? Because our industry spends too much time on financial engineering and not enough on strategic repositioning. Capital structure isn't static – it's a dynamic tool for value creation. The best GPs don't just squeeze more EBITDA from their companies; they reshape the financial architecture itself. The line between "market opportunity" and "strategic transformation" is where the real money gets made. That's the playground I operate in. Who else has executed similar strategic plays recently? Would love to hear your stories. #PrivateEquity #M&A #ValueCreation #CapitalStructure #StrategicFinance

$1B. $10B. $100B. Startup valuations are hitting massive numbers. But here's the secret most founders don't know: 𝐒𝐭𝐚𝐫𝐭𝐮𝐩 𝐯𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧𝐬 𝐚𝐫𝐞𝐧’𝐭 𝐚𝐬 𝐨𝐛𝐣𝐞𝐜𝐭𝐢𝐯𝐞 𝐚𝐬 𝐲𝐨𝐮 𝐭𝐡𝐢𝐧𝐤. It's not just about revenue or profit. Investors use a mix of art and science to determine how much a startup is worth. 𝐇𝐞𝐫𝐞 𝐚𝐫𝐞 8 𝐦𝐞𝐭𝐡𝐨𝐝𝐬 𝐕𝐂𝐬 𝐚𝐧𝐝 𝐚𝐧𝐠𝐞𝐥 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬 𝐮𝐬𝐞 𝐭𝐨 𝐯𝐚𝐥𝐮𝐞 𝐬𝐭𝐚𝐫𝐭𝐮𝐩𝐬: 1. Berkus Method Assigns values to key success factors (team, product, etc.) for pre-revenue startups. 2. Comparable Transactions Looks at how similar startups were valued or acquired. 3. Scorecard Valuation Compares a startup’s strengths against competitors to adjust valuation. 4. Cost-to-Duplicate Estimates how much it would cost to rebuild the company from scratch. 5. Risk Factor Summation Adjusts valuation based on 12 key business risks. 6. Discounted Cash Flow (DCF) Projects future cash flows and discounts them to today’s value. 7. Venture Capital Method Estimates future exit value and works backward to today’s worth. 8. Book Value Method Measures a startup’s valuation based on net assets. If you’re a founder raising capital or an investor looking at deals, you need to understand how valuations actually work. No single method is perfect. Investors often combine multiple approaches to get a realistic valuation. How do you think startup valuations should be measured? Let’s discuss in the comments. Join the weekly EverythingStartups newsletter for more startup & VC inside tips, in less than 5 min a week. Link in my bio :) #startups #startupvaluation #VC #valuations #unicorns #venturecapital

Volatility laundering 🧺 in private equity: Here are some concrete numbers! My favourite parts from a revealing Bloomberg article that shines light into the world of unlisted assets: ▶️ Private markets is an industry famous for grading its own homework in terms of performance and for awarding itself generous pay based on the results. ▶️ The direct alpha approach Griffiths, the former head-quant of private-asset giant Ares Management, devised, compares cash flows—both contributions and distributions—with what the dollars would have been worth if they’d been invested in a public equity index in the same time period. That benchmark could be a broad one like the S&P 500 or perhaps a gauge of stocks in the same industry the fund invests in. The comparison should tell you how much you earned in excess of the market, or how much you lagged it. “Many times we found that somebody who had great absolute returns just happened to be invested in the right sector at the right time,” Griffiths says. ▶️ In one study published in 2023, he and co-authors Oleg Gredil at Tulane University and Ruediger Stucke, head of quant research at private equity firm Warburg Pincus, conducted a direct alpha analysis on a database of more than 2,400 funds specializing in buyouts. Their average reported internal rate of return (IRR)—the annual rate of growth based on a fund’s cash flows—was 12.3%. But how does that compare with other investments? The researchers found that the funds’ direct alpha was 3.1% using a broad market benchmark and 1.7% based on industry indexes. ▶️ Those are still good numbers, but for many investors it may be too little reward for locking up cash in illiquid and often leveraged assets for long periods. The average also obscures a notoriously wide range of outcomes. Meanwhile, venture capital funds fared even worse using this lens, with an average alpha of zero compared with similar listed stocks. ▶️ “It turns out a lot of firms with pure-play products in that industry have great IRRs,” says Ian Charles, managing partner at Arctos Partners, which runs a strategy offering capital solutions to private equity managers. But alpha analysis told a different story. The firms' actual alpha generation—the value it added—was “indistinguishable from zero” after adjusting for fees and broader industry performance. ▶️ The added insight from direct alpha is winning over influential fans. Japan’s $1.6 trillion Government Pension Investment Fund uses a version of it in combination with more established tools of analysis. Norges Bank Investment Management, which manages the $1.8 trillion Norwegian SWF, used the method as it weighed whether to enter the asset class. ▶️ In a study this year, Mark Anson, CIO of $29 billion Commonfund, found the volatility of large buyout funds almost doubles to 21%, far higher than the S&P 500, if you account for lags in the reporting of valuations. (+++Opinions are my own. Not investment advice. Do your own research.+++)

I’ve seen founders celebrate a 3X ROAS but struggle to explain how long it takes to recover what they spent. Everyone talks about CAC. No one talks about payback. How long does it take to earn that money back? Here’s a breakdown: 1. First, define CAC correctly. It’s not just ad spend. CAC = Total sales + marketing cost / Number of new customers acquired Include: • Media + agency fees • Team costs (salaries, tools, commissions) • Discounts, freebies, referral bonuses Exclude returning customers: CAC is only for new acquisition. 2. Next, calculate payback period. That’s how long it takes to recover CAC from gross margin, not revenue. Payback = CAC / Gross Margin per month per customer For example: If your CAC is ₹1,000 and you make ₹200 in gross margin per customer per month, your payback period is 5 months. 3. Why does this matter? • If payback > 12 months, your growth is capital-intensive • If payback < 3 months, you’ve got a lean acquisition engine • If CAC is rising and payback is stretching, you’re scaling too fast or inefficiently 4. Bonus: Always look at CAC:LTV ratio • Healthy benchmark: 1:3 (spend ₹1 to make ₹3 over the customer lifetime) • Anything below that = long-term loss, even if ROAS looks good short term Performance marketing is powerful. But only when CAC, margin, and payback speak to each other. Did you find this useful?

Private Equity Math 101 (Part 4): Don’t underestimate the impact of cash on PE fund returns In our prior post, we explained the math behind a PE fund. As a reminder, our fund’s performance stood at a 1,76x net multiple on invested capital (after fees), and an “internal rate of return” (IRR) of 10,62%. Is that… good? First, let’s explain IRR: It’s the return at which the capital invested through our capital calls has to compound to produce subsequent distributions. Our fund IRR of 10,62% might look good on first glance - after all, public equities have generated long-term returns of ~7% p.a., almost 4% lower than our PE fund. But don’t be tricked: IRR and annualized returns are not the same. There are two ways to make numbers comparable. First, the so-called “public-market equivalent”, where you assume that cash flows invested into a PE fund are instead invested into a comparable public benchmark.. However, as we cannot forecast equity returns, we instead rely on another method: Using a money- and time-weighted return for a portfolio consisting of the PE fund AND the cash required to serve the capital calls. To do so, we first forecast the net asset value (“NAV”) of our fund, and subsequently, the combined portfolio. Starting with our committed 25M€, we see cash move into the PE fund, and even assume interest income on residual cash. We’re almost fully invested in 2027, shortly before the PE fund’s NAV peaks in 2028, before seeing substantial distributions. Eventually, we reach 47.5M€ in cash after the fund is fully liquidated. Using those values, we can now calculate our time- and money-weighted returns: While PE returns are lower in the first years (the famous “J-Curve”), annual returns reach double-digit levels in 2027-2030. But year-by-year returns are not meaningful - it’s the annualized return that counts, and that’s where we really see the truth: Our 10,62% IRR turns into a 10-year return of ~6,6% p.a. - actually slightly below the often-quoted 7%. Realistically, cash would not stay idle, but be reinvested into PE or into other asset classes, thus reducing “cash drag”. Nevertheless, there are two big takeaways: First, that we shouldn’t be dazzled by IRRs but calculate how our actual cash-on-cash returns look like. Second, that fund-level IRRs actually need to be higher than one might assume: In my model, it takes a 1,81x net fund multiple (and a ~11,5% IRR) to match the 7% public equity return - without even taking into account illiquidity. You might argue that if your PE portfolio generates the returns highlighted here, it’s not worth it, and I agree - but they are not so far away from the median, and actually above long-term bottom quartile returns. We all say we only pick winning funds, but nobody can guarantee it. In the final part of our series, let’s dive into how things look at the portfolio level - make sure to follow Cape May Wealth and me not to miss out. #privateequity #buyouts #privatewealth

Many founders get blindsided during valuation discussions. They walk into investor meetings with a number in mind. But they can't defend it. Here's the reality... Investors don't use just one method to value your startup. They use multiple approaches based on your stage, traction, and market. Understanding these 8 methods puts you in control of the conversation. For Pre-Revenue Startups ☑️ The Berkus Method breaks your startup into 5 categories. Your idea, team strength, product progress, market readiness, and strategic relationships. Each gets up to $500K. Add them up for your valuation. ☑️Scorecard Valuation starts with local market averages. Then adjusts up or down based on how you compare to other funded startups in key areas like team quality and market size. ☑️Risk Factor Summation takes a base valuation and adjusts it across 12 risk categories. Strong team? Add $250K. Intense competition? Subtract $250K. For Revenue-Generating Startups ✅ Comparable Transactions looks at recent deals for similar companies. If SaaS startups at your stage get 8x revenue multiples, that becomes your baseline. ✅Discounted Cash Flow projects your future cash flows and discounts them to today's value. Higher risk means higher discount rates and lower valuations. ✅Venture Capital Method works backward from your projected exit. If VCs want 10x returns and see a $100M exit, they need to invest at a $10M valuation. Universal Methods 🔵Cost-to-Duplicate estimates what it would cost to rebuild your startup from scratch. This often becomes the valuation floor. 🔵Book Value simply subtracts liabilities from assets. Rarely used for high-growth startups but relevant for asset-heavy businesses. Don't rely on one method. Triangulate using 2-3 approaches that fit your stage. A pre-seed startup might blend Berkus, Scorecard, and Risk Factor. A Series A company could use Comparable Transactions, light DCF, and the VC Method. Valuation isn't just about the number. It's about showing you understand how investors think. When you can speak their language, negotiations become conversations. And conversations lead to better outcomes. --- Follow me (Nidhi Kaushal) for more fundraising insights that actually work. DM me or click the link in my bio to book a 1:1 call and discuss your fundraising strategy 📞

🚨 Redefining #ESG and #SustainableInvesting ✨ What’s new about Stuart Kirk’s theses? Recently, I had the pleasure to listen to his keynote speech at the FuW Forum Beyond #Sustainability in Zurich. You may remember the former HSBC Head of Responsible Investing from the Financial Times Moral Money Summit, where he famously downplayed the financial risks of climate change, referring to warnings as "unsubstantiated, shrill, partisan, self-serving, apocalyptic." This had caused quite a stir in the sustainable investor scene. So, how provocative are his theses nowadays? Here is my assessment: 1.    Input or output ESG (responsible versus sustainable) - ESG should be split in two Actually, ESG has already been split in three kinds of approaches: a.    For #ethical investors who want to sleep well (exclusions) b.    For #risk-aware investors considering ESG to be financially material additional data to assess investments c.      For #impact-oriented investors, who believe the full assessment of investments needs to consider the impact as well (#DoubleMateriality) The different approaches are enshrined in Art. 6 to 9 EU #SFDR, numerous regulations on fund names and recognised by labels such as Forum Nachhaltige Geldanlagen e.V. 2.    Admit you cannot have higher returns and lower risk This is a tautology from the Markowitz model. It holds true for the entire market or if you operate at the model’s “efficient frontier”. But most funds do not. So, if you can process additional financially material data, the potential for higher risk-adjusted returns is clearly there. 3.    Realise that sustainable investing does not focus on returns It does focus on returns by helping you to: a.    Identify truly future-proof business models b.    Consider additional risks emanating from global challenges c.    Engage with companies to bring a long-term view d.    Collaborate with other investors “to build the (regulatory) field” for sustainable companies to thrive 4.    Find sustainable funds that align with your values. This vindicates the EU SF Disclosure Regulation, which forces sustainable funds to disclose their approaches to help investors chose funds according to their values. 5.    If you are an equity investor, have an activist mindset. Vote! ...yes, and engage even more! That is common sense. What is maybe still new: you can engage with companies even if you don’t own them. It is the carrot you are holding.   6.    Don’t forget the power of credit and other forms of direct funding Agreed, but the impact you can have as credit investor in creating “rollover risk” has long been acknowledged. My summary: I am glad that the sustainable investing market is sufficiently developed and differentiated and transparent for everyone to find their preferred approach, from minimum exclusions to impact. radicant bank #InvestInSolutionsNotProblems Sasha, Nico, Eve Morelli, Arlette, Matthias 

Many people ask me, 'What is the real impact of #sustainableinvesting?' I am pleased to share an insightful paper that addresses this important question: 'The Impact of Sustainable Investing: A Multidisciplinary Review,' authored by Emilio Marti, Martin Fuchs, Mark DesJardine, Rieneke Slager, and Jean-Pascal Gond, and published in the Journal of Management Studies. Key insights: 💡 Three #Impact Strategies: Sustainable investors utilize three primary strategies to influence corporate #sustainability: portfolio screening, shareholder engagement, and field building. Each strategy plays a distinct role, with portfolio screening and shareholder engagement creating direct impacts on companies, and field building driving change through broader systemic influence. 🏢 Direct Impact on Companies: Portfolio screening and shareholder engagement primarily result in direct impact on companies by reallocating capital to sustainable firms and engaging directly with corporate leadership. This can lead to changes in corporate practices, from reducing carbon emissions to improving supply chain ethics. 🔗 Indirect Impact through Other Shareholders: Sustainable investors also influence other shareholders by shifting their perceptions and encouraging them to adopt sustainable practices. This indirect impact is crucial as it amplifies the efforts of early movers, creating a ripple effect across the investment community. 🏛️ Indirect Impact via the Institutional Context: Field building goes beyond influencing individual companies or shareholders. It reshapes the very institutional contexts in which businesses operate, through activities such as establishing voluntary standards, supporting regulatory changes, or delegitimizing harmful business practices. This broader impact is essential for driving industry-wide change. 🔄 Shareholder Impact as a Distributed Process: Sustainable investing is not a one-time effort. Impact emerges gradually, as different types of shareholders—both mainstream and peripheral—build on each other's efforts. This collaborative and distributed process underscores the importance of diverse investor involvement in achieving meaningful, long-term change. 📈 Implications and Future Research: The authors argue that understanding sustainable investing's impact as a distributed process opens up new avenues for research. Future studies should focus on the interaction between direct and indirect impacts, why shareholders choose different strategies, and the limitations of specific strategies. These insights will help refine our understanding of sustainable investing and its ability to drive systemic change toward a more sustainable economy. In my view, this paper offers a profound and multifaceted understanding of how sustainable investing influences not just companies, but entire industries and the institutional frameworks that shape corporate behaviour. #ESG #ImpactInvesting #CorporateSustainability #FutureofFinance