4 questions value investors must ask when evaluating the management of a company!
In value investing and stock picking , an important aspect to consider is the quality and strength of the management. The management plays an important part in creating long term wealth for shareholders of any company and good investors understand this fact very well.
It is obvious that historical data of profit and loss statement and Balance sheet. However another important piece of information is management interviews, industry reports and company actions.
After years of investing and following great investors here are 4 points which you must keep in mind as a value investor whilst evaluating the strength and quality of the management.
Is the management taking actions or applying strategies to maintain healthy financial position of the company ?
The financial condition of the company is crucial and is very much in the hands of the management. If you want to make multi-fold returns then your company will need financial resources to maintain existing business, invest in growth and new projects, meet near-term obligations and repay debt. High amounts of debt is usually a red flag. Also to get a good measure of this I would advise you to focus on return on equity as a metric rather than Earnings per share.
Is the management focused on widening the “moats” around its businesses which gives it competitive advantages ?
A truly great business must have an enduring competitive “moat” that protects excellent returns on capital invested. The nature of capitalism guarantees that competitors will repeatedly assault any business castle. Therefore a formidable barrier such as a company’s being a low cost producer (Reliance in OIL) or possessing a worldwide brand (Colgate,Gillette) is essential for sustained success. Therefore it becomes necessary that management focuses on widening the “moats” around its business.
Is the management taking steps to acquire and developing varied streams of earnings ?
The management needs to invest in growth and diversify its revenue stream to secure the future of the company. Many companies fail because they rest on their laurels and become complacent. Perhaps the best example of this would be Kodak which got disrupted because it did not see the change to digital cameras coming.
Is the management expanding and nurturing outstanding operational mangers ?
The management also needs to nurture and expand its management team to keep performing well in the future. Most great companies have excellent.
It is important to note that these 4 points will help you get an estimate about the management and its actions. However the list is far from complete.
If you have any questions , please feel free to comment below.