Tuesday 28 March 2017

Why and How to do Management Analysis of a Company

Friends,

We all have heard this adage "A man is known by the company he keeps". In the same way, it wont be wrong to say that "A company is known by the management team it keeps".

Management refers to the people involved in running the company. These are the CXO level employees of the company e.g CEO, COO, CFO and also the VPs and Directors.

Courtesy: Kunal Updadhyay


Importance of Management
  1. These individuals are responsible for looking after the operations of the company and have the biggest impact on the company's performance
  2. They take key decisions - how much to capital to invest, where to invest, what products or services to sell, how to sell it, how many people to hire so on and so forth
  3. Two companies that look identical on paper in terms of size, products it sells and geographies it serves may perform differently due to different management teams. So its one of the determinant of how well the company performs
  4. When the industry in which it operates or if the economy goes through a rough patch, its the business acumen and experience of the management that keeps the company going in terms of sales and profits. A recent examples of this is Nestle India (Maggi Noodles lead content issue)
Due to the above reasons, management plays a HUGE factor in a company's performance. We know that the performance will ultimately reflect in the stock price of the company. Hence its a no-brainer that we MUST do thorough analysis of the management team in order to be a successful stocks investor. A stock trader does not need to do this analysis since a trader is taking his buy/sell decisions basis the stocks chart pattern i.e price/volume action only.

Analyzing Management - key point to note:

Unlike the other 3 pillars of fundamental analysis which I follow - Business & Industry Analysis, Financial Analysis and Valuation Analysis; Management analysis is mostly a QUALITATIVE (hence subjective) approach than QUANTITATIVE (objective approach).

Listed below are the questions I try to get answers for when researching a company for a potential investment:

Subjective:
  1. Do the Promoters and the Board of Directors have a clean untarnished background; clear from fraud or any other crimes?
  2. Is the Promoter also on the Board of other companies which are in similar businesses?
  3. Do the Independent Directors on the companies board have sufficient credentials to be on the board?
  4. Does the management team have a strong KNOWLEDGE, EXPERIENCE & PASSION for the business?
  5. Does the management team show HONESTY & TRANSPARENCY in dealing with stakeholders?
  6. Is the promoter/owner of the company also the CEO?
  7. For how long the CEO and top management has been serving the company?
  8. Does the company have succession plans in place for key management positions and how much salary is being paid to potential successors?
  9. If the promoter/owner is not the CEO, then is he/she an employee who was groomed from within or hired from outside the company?
  10. If the CEO is from outside does he/she have relevant experience in the industry in which the company operates?
  11. Is the management teams pay linked to the performance of the company? Does their salary increase even when the companies profits have been sinking?
  12. Does the management team have a fine balance of big picture thinking and hands-on operations?
  13. Does the management report quarterly and annual earnings on time?
  14. Is there too much bureaucracy in the company; especially to be watched out if its a government owned company?
  15. Does the management make extravagant use of company's funds?
  16. Does the management provide transparency in its communications during a time of crisis for the company or when they have couple of bad quarters of sales?
  17. Does the management treat minority shareholders fairly in regards to its relations with its foreign parent MNC company and subsidiaries?
  18. Is the company banking on a superstar CEO or an overall strong process and people oriented corporate culture?
  19. Does the management of the company care for having a functional and updated company website?
  20. Has the management used excess cash in the past for senseless "diworsefication" of business into area that is not their expertise?
  21. Do the CXO level employees walk the talk and stick to what they comment/promise in the annual report?
  22. Has the management in the past announced share buybacks when the stock was perceived to be undervalued by them and/or paid consistent dividends? Do they care for minority shareholders?
  23. Is there a bureaucrat on the board? If Yes is there sufficient reasons for him/her to be on the board? Is the company in an industry where having them is value add? Does their presence add value or just crony capitalism?
Objective:
  1. Is the Salary of promoters less than 11% of Net Profits?
  2. Is the promoter shareholding greater than 51% or if its less than 51% then is the number consistent across last 5 years?
  3. Has there been an increase in promoter shareholding in the last 4 quarters or even last 3-5 years?
  4. Do large institutions like Mutual Funds, Insurance companies and HNIs have holdings or increased holding in the company in recent quarters?
While there are no right or wrong answers to these questions, as an investor I am not comfortable investing in a company's stock unless I asses the company on these questions. Some of the questions are non negotiable for me and few other may be negotiable but I will keep them in the back of my mind to monitor those closely.

Where will we find the answers to these questions?
Answer: Google!

You should find pieces of information in the companies website, annual report, BSE/NSE website, Credit reports published by ICRA, CRISIL and CARE, other blogs, equity research published by stock brokers and independent equity research analyst. The trick lies in gathering the pieces of information and then connecting the dots and putting the story together.

As I learn more in this space, during my journey, I will update this list with additional questions.

Happy Ugadi & Happy Investing!










No comments:

Post a Comment