“Terrible companies do not exist; only bad managers do.” Every outstanding investor will emphasize the significance of a company’s management. However, it is difficult for retail investors like us to evaluate management directly. There isn’t a CEO in the world who would turn down an investment like Buffet, but that isn’t the case for everyone. In this article, we’ll look at how to evaluate a company’s management before investing in any stock. Here, we’ll look at the factors that we can consider when evaluating a company’s management.
How to Evaluate a Company’s Management for Investing?
The executives who run a company are in charge of shaping the company’s future. We often forget that a firm is ultimately controlled by humans. The management quality is sometimes disregarded as a result of this review.
On the other side, management quality isn’t quantifiable, and we can’t rate each management based on encounters. Despite this, there are a number of variables that can assist retail investors in determining the quality of management. The following are some of them:
1. Promoter / Top Manager Background
Finding the background of senior management and promoters is the first step in evaluating management quality. This would include their accomplishments, the company’s performance under their leadership, and any other pertinent information.
It could be a credit to their leadership if they have maintained good and consistent growth for a long time (10 years). On the other side, if we come across news that paints the management in an unfavorable light, we should avoid the person. Thankfully, thanks to technology, this can now be done by just googling the person’s name. This data can also be utilized to examine the promoters’ and management’s abilities.
2. Ownership of the promoter
It’s also worth noting how much of a company’s stock boosters own. Promoters with 50% or greater ownership in a company are a positive sign. Promoters with a small share in the firm and rumors that they may continue selling, on the other hand, are a warning indicator. Institutional investor holdings could also be a sign.
3. Long-term plans, strategies, and objectives
When analyzing a company’s management to invest in a stock, it’s critical to look at the company’s future objectives, strategy, and goals. Simply go over the company’s Vision, Mission, and Value Statement to get started.
Together, the company’s mission and vision guide strategy development, help shareholders understand the company’s purpose, and inform the goals and objectives set to determine whether the plan is on track. As a result, these stated future statements for the company might assist an investor in deciding whether or not to buy a stock on the Indian stock market.
4. Managers’ remuneration
The yearly reports reveal the amount of salary paid to management. This attribute provides information about the managers’ objectives. The proportion of rising in managerial salary in contrast to profits is one of the most important things to check for here.
It is an indication of bad leadership if the company has fared poorly in terms of profitability but the CEO receives a raise. Another red flag is that the percent increase in remuneration is greater than the percent increase in profits. To comprehend the disparity, one might compare CEO salaries within the same industry.
Look into the employee’s benefits as well. If the company provides good benefits to its employees and employees, this is also a sign of successful management. The success of a firm is largely determined by the performance of its employees and employees. Happy employees are more likely to deliver their utmost effort. If, on the other hand, there are frequent strikes or rising worker union demands, it shows that management is unable to meet the needs of its workers and employees. Such incidents are a red flag for the company’s investors.
5. Transparency and communication
The most crucial aspects to consider while evaluating management are communication and transparency. The company’s growth is dependent on the management’s integrity. It is the responsibility of management to provide shareholders with “fair” quarterly and annual results.
In the same manner that management enthusiastically promotes the company’s positive performance, management should come forward in times of poor results to explain its reasoning to its shareholders. Good management ensures that the organization’s transparency is maintained at all times. Elon Musk was widely chastised in 2018 after tweeting, “Am considering taking Tesla private around $420.” “Funding has been secured.” However, this was untrue, and Musk had to face penalties from regulatory authorities afterward. This was a case of ineffective communication.
Being at the head of a company requires CEOs to explain things as they are, not to hide or falsify facts, or to play pranks.
6. Chairman and key directors
It’s also crucial to conduct background checks on other people in high-ranking positions. The board of directors, chairman, independent directors, and others fall within this category. Bureaucrats are frequently nominated to boards of directors as independent directors.
Even though they may have substantial administrative experience. The job is sometimes offered in exchange for other benefits, such as government permissions.
7. The importance of the share price
The share price is frequently used to assess a promoter’s or manager’s success. Although top management is required to create profit for investors, making choices purely based on the share price is unhealthy.
A red sign is top management’s obsession with the stock price. These executives may be hesitant to take actions that will benefit the company in the long run if they will harm the shareholders in the short term. It’s also worth noting that a company’s share price is determined by market factors.
8. Transactions with Related Parties
“Related Party Transactions” is another essential element of the yearly reports. This section details the company’s transactions with other entities owned by the promoters or their family, as well as joint ventures. This section will disclose whether the company’s promoters profit at the expense of other shareholders. As a result, the section must be thoroughly examined.
9. Management Predictions
Sections such as “The Directors Report” and “Management Discussion and Analysis” are also included in the annual reports. These papers detail the management’s goals and forecasts for the future of the company.
10. Capital Allocation
The way a company’s free cash flows are used is referred to as capital allocation. These options include reinvesting in the company, paying dividends, holding as cash, and so forth. The skillset of a CEO may also be judged by looking at how he manages funds to keep investors happy and develop the company.
In most cases, a company’s cash is earned through its profits. Investors must, however, identify the source of dividends when they get them. Even though the company’s net debt to Ebitda grew in 2014, corporations like L&T and Hindalco paid out dividends.
11. Promoter purchases and share repurchases
The company’s promoters have the most up-to-date information on the company’s performance. Management and top officials have a good understanding of the firm’s future prospects, and they are usually correct if they anticipate the company will outperform in the future. As a result, promoter purchases and share buybacks are signs that the company’s owners believe in the company’s future.
Furthermore, the opposite scenario, in which the promoters or CEOs sell some of their stock, is a separate action that cannot be interpreted as a negative signal. We can’t estimate the company’s future based on the promoters’ occasional sales of a small amount of their stock. Perhaps the promoters require funds to launch a new business, purchase a new home, or take a trip. Everyone, including founders, has the right to sell stocks when they are most needed.
In short, promoter purchases and share repurchases are signs of a strong company. However, we cannot assess the company’s prospects solely based on the promoters’ sale of a portion of their stock. In any case, if the promoters are selling a large number of stocks without explaining why, it’s a subject that has to be looked into more.
We addressed how to evaluate a company’s management before investing in any stock in this article. The value of having a good management team cannot be overstated. This is also an important aspect of qualitative research. Only looking at the financial figures gives us a partial image of the company. Using the aforementioned factors, we can get a better image of the company. Good luck with your investments!
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