Due Diligence and the Quality of Earnings

Due diligence investigates what must be true for an investment to succeed. Its scope should follow the thesis rather than the arrangement of a data room. A business acquired for recurring revenue requires close examination of customer retention and contract quality. A manufacturing investment requires evidence about capacity, maintenance, supply reliability, and margins across the cycle.

The investigation should distinguish facts, estimates, and judgments. A signed contract is evidence of a commercial relationship. A forecast renewal rate is an estimate. The view that the relationship will remain profitable is a judgment that requires further support. Mixing those categories makes uncertainty disappear from the presentation without removing it from the investment.