Unlike Quantitative Analysis, there is no fixed formula to judge a company’s management & it cannot be calculated using Balance Sheets or income statements. The info abt management is not readily available on the internet.
Then, how to analyse a company’s management?🤔
Then, how to analyse a company’s management?🤔
"I think u judge management by 2 yardsticks. One is how well they run business, & I think u can learn a lot abt that by reading abt both what they’ve accomplished & what their competitors have accomplished & seeing how they have allocated capital over time."
- Warren Buffett
- Warren Buffett
Analysing the values of a manager is not an easy task.
So, we can study & analyse some non-quantifiable parameters:⤵️
So, we can study & analyse some non-quantifiable parameters:⤵️
1⃣Promoter’s Background
You need to check:
• Quality of management can be defined by their experience & skills.
• Past track record of the promoters
• Flexibility & transparency of management
• Decision making
• How long the managers have been managing the firm
You need to check:
• Quality of management can be defined by their experience & skills.
• Past track record of the promoters
• Flexibility & transparency of management
• Decision making
• How long the managers have been managing the firm
2⃣Promoter’s Remuneration:
As per section 197 of the companies act, the total managerial remuneration paid by the public company to its directors, managing directors, and whole-time directors should not exceed 11% of the company’s total profits.
As per section 197 of the companies act, the total managerial remuneration paid by the public company to its directors, managing directors, and whole-time directors should not exceed 11% of the company’s total profits.
Management’s salary gives a critical idea abt their intentions of running a company. The right way to analyse the remuneration is by comparing the salary trends with the sales & profit grow
One needs to note that rising remuneration is justified only when the company’s performance is growing. Otherwise, it may indicate that the company is not implementing proper corporate governance principles.
3⃣Capital Allocation:
If any investor invests in a company, he expects the management to utilize the money in the most efficient manner & deliver exemplary returns but sometimes management fails to do this & ends up wasting the investor’s hard-earned money.
If any investor invests in a company, he expects the management to utilize the money in the most efficient manner & deliver exemplary returns but sometimes management fails to do this & ends up wasting the investor’s hard-earned money.
Good Capital Allocation is when management invests excess free cash flow that business generates.
Finding CEO who is good at operating the company & allocating capital efficiency is tough. So, we can check this through ROCE, which shows the capital efficiency of the business.
Finding CEO who is good at operating the company & allocating capital efficiency is tough. So, we can check this through ROCE, which shows the capital efficiency of the business.
4⃣Related party transactions:
There have been instances where the promoters pumped company’s money to outsider. They take a loan in company’s name & instead of using it for company, they divert it somewhere else. However, related party does not always indicate fraud.
There have been instances where the promoters pumped company’s money to outsider. They take a loan in company’s name & instead of using it for company, they divert it somewhere else. However, related party does not always indicate fraud.
Here are some of the related party transactions which investors should look upon:
• Transaction between promoter & Company
• Buying & selling assets/stakes between company & promoter’s entity
• Funding the promoter’s venture
• Transaction between promoter & Company
• Buying & selling assets/stakes between company & promoter’s entity
• Funding the promoter’s venture
Evaluating the management’s quality is an integral part of the analysis. Stressing only on the financials will never give you the complete picture.
As a value investor, you must invest in a company where management puts shareholders' value above their selfish motives.
As a value investor, you must invest in a company where management puts shareholders' value above their selfish motives.
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Learn more about company analysis with our interesting course on Value Investing on Quest - quest.finology.in
Learn more about company analysis with our interesting course on Value Investing on Quest - quest.finology.in
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