Financials of a company are tools to measure company’s success. But for selecting good stocks, we also need to analyse qualitative aspects of a company along with its financials. Qualitative aspects of a company depend upon management of the company. In this blog we will find out how to evaluate management of a company.
One can evaluate a company’s management by considering below mentioned points, which could be found in the annual report of company:
1. Honesty – Is management communicating bad news as freely as good news?
2. Management should not be biased towards promoters. Is it lending loans to promoter companies that could have been distributed to shareholders ?
3. Capital allocations – How management is allocating capital? Is it wasting resources in loss making investments or projects. Check Return on capital employed ROCE). It should be above 15% in general cases.
4. Does management rectify its mistakes made earlier? For example – XYZ ltd had acquired a loss making enterprise last year. Now is management considering to hold such enterprise or to dispose such enterprise to rectify its mistake made earlier?
5. Check whether promotor is drawing salary in excess of the limits under companies act 2013.
6. Whether salary of promoter is increasing year by year despite of declining company’s profits
7. Investors should check whether promoters are lending money to their related parties without any sound reason.
8. Check whether management is continuously acquiring loss making enterprise. Also the management should generally make investments in businesses which are related to core competencies of the company.
9. Check Promoter’s background including their educational qualification, years of experience, companies handled by them in past.
10. Whether management has track record of fulfilling the promises made earlier. Read past years annual reports to identify what promises were made by management and did management fulfil those promises in timely manner. Delayed project work means huge interest cost.
This is how you could evaluate management of a company. This is also an answer to the question “How to find quality stocks?”