Approach to Due Diligence
Overview of Moulton Harrox’s approach to due diligence

Moulton Harrox’s approach to due diligence and what we look for

Step 1: Annual results presentation
If not interested in / don’t understand the business from review of this, little point in proceeding further
Key document for identifying risks and issues that break the investment caseFurther diligence required if thesis in tact and no definitive red flags
Review of latest news and performance to reveal any issues that break the investment case
Step 2: Annual report
Step 3: Interim reports and news releases
Step 4: Peer and market review

• The company’s ‘sales brochure’ to investors

• Summary of business model and investment case, usually in visually helpful diagrammatic format

• ‘First look’ at the annual results and outlook statement (released with preliminary results

• The best single source for understanding what the business does

• Outline of strategy and key value drivers

• Detailed risk factor section

• Review of revenue recognition policies•Review of adjustments made to EBITDA/EBIT and whether these are truly one-off / exceptional

• The ‘nasties’ (off balance sheet items and related party transactions) are generally always found in the notes

• Management and Board compensation. Peers used as benchmarks for performance criteria also identifies key competitors for review

• Auditor statement and any qualifying comments•Reveals the ‘tone’ of management and the board

• Does the reporting format and KPI disclosures change year to year –red flag if changes so that performance can’t be consistently measured

• How do earnings differ from operational cash flow –large discrepancies can be a red flag of undesired accounting manoeuvres

• Large working capital swings that could indicate ‘stress’ within the business

• Financing facility review to understand funding availability, covenants and maturity profile

• Contingent liabilities and pension deficits

• Understand options, warrants and convertibles for possible dilution

• Ongoing review of whether the business is delivering against announced objectives

• Track shareholder and director selling/buying activity

• Material news that may confirm or change the outlook, both positively and negatively

• Does the company’s market provide structural headwinds or tailwinds, either permanently or temporarily

• Comparison of key metrics to understand opportunities for upside or discrepancies that could indicate reporting irregularities

• Identify what peers are doing differently that could lead to a competitive advantage

• Never provided with non-public sensitive information, but opportunity to fully understand the business model and key drivers

• Specific questions relating to disclosed information to clarify factual understanding

• Understand the tone and style of management

• Provide additional colour on reality vs. reporting and disclosure messages


Annual results presentation


Annual report


Interim reports and news releases


Peer and market review