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About the enterprise to equity value bridge: what a due diligence has to do with valuation

How do the results of a due diligence help when it comes to valuing a company’s equity? And why does a due diligence only cover free cash flow and not the net cash flow / total cash flow?

In the following article, I am going to illustrate this.

Let’s have a look at the cash flow statement:


./. Change in working capital

./. Capex

= Free cash flow

./. Tax

./. Financing cash flow

= Net cash flow (change in cash and cash equivalents)

The tax environment and the financing structure almost fully depend on the existing owner and can be modified by the new shareholders. Which loans to take, how to structure your company to support a tax-friendly environment can vary from owner to owner. Therefore, this is often excluded from the due diligence when looking at cash flows.

But when it comes to the free cash flow, many analyses are combined.


EBITDA covers everything from the income statement, especially revenue analysis, cost analysis and adjustments, if an adjusted cash flow is illustrated.

Working capital

Working capital covers the working capital analysis, most prominently understanding the drivers and seasonality of working capital.


Capex covers the investment policy of the company.

Final thoughts

Taking all these analyses together shows that when it comes to valuing a company’s equity, all topics that have been analyzed in a due diligence, are combined here again.

Back to the overview


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