"Uncovering the Financial Health of Assets: The Benefits of Financial Due Diligence"

[Pratap Koppula]

Financial due diligence helps in making informed investment decisions by providing key performance indicators (KPIs) such as financial position, operational performance, and liquidity. These KPIs provide critical insights into the ‘Assets’ financial health and can guide investors in making well-informed decisions.

1️⃣ Net Operating Income (NOI) 💯: This is the total income from the property minus all operating expenses 🔝. It can be an absolute value or expressed as a % of sales.

2️⃣ Capitalization Rate (Cap Rate) 💯 : This is the ratio of 'net operating income' to the purchase price (market value) of the property🔝.

3️⃣ Cash-on-Cash Return (CoC) 💯: Cash available to Investros divided by Cash invested 🔝.

4️⃣ Net Present Value (NPV) 🔢: NPV measures the present value of future cash flows generated by the investment, taking into account the cost of the investment 🔛.

5️⃣ Internal Rate of Return (IRR) 💯: It is the rate of return that makes the present value of the future cash flows from the investment equal to its initial cost 🔝.

6️⃣ Sales multiplier ❌: Sales multiplier is a key performance indicator used to measure Price of the asset in relation to assets sales, particularly in the rental and hospitality 🆗.

7️⃣ Rent per Square Foot ➗: It is a Key Performance Indicator used to measure rental income, per squarefoot, often popular in CRE ♊ .

8️⃣ Debt Service Coverage Ratio ➗: It is a measure of a property's ability to generate sufficient income to cover its debt obligations (Cash available for Debt divided by Loan installment) ⁉.

9️⃣ The interest coverage ratio ➗: It measures a real estate asset's ability to cover its interest payments (Asset's net operating income (NOI) divided by Interest. ⁉.

🔟 Debt-to-Equity Ratio➗: A measure of financial leverage, calculated by dividing its total liabilities by its shareholders' equity ⬇. Excessive leverage can lead to failure.

1️⃣1️⃣ Loan-to-Value (LTV) is a useful metric to assess the risk of leverage in real estate investments, often used by lendors.

In the next post we will cover ‘Operating Income KPIs’ analysis deep.