Management analysis is the utmost important factor before investing in stocks because a great management can turn around a poor business and poor management can ruin good business. Now the big question comes, “How to evaluate the management ?” Many analysts will coin the idea of management visit, discussion with founders, factory/plant visit, etc.
However, in reality it is not feasible to visit the factories or company headquarters before investing in any stocks. (Mainly for retail investors)
How to evaluate the management? – Feasibility
Suppose, you have invested in twelve different stocks. Those 12 companies are headquartered in 8 different cities. Before investing, is it possible for you to visit all those cities to meet the management? I am sure that for millions of small investors, it is next to impossible to meet the management before investing in any companies. Coming back to the analyst’s meeting with the management, I have serious doubt in this front too. Suppose, you are the CEO of the company, and I am an equity analyst of reputed brokerage house. During our meeting, do you confess any drawbacks of the company? Your primary target will remain to please me so that I can compose good research report, and thus it boosts the stock price. After all, being the CEO, you will be benefitted the most from raising stock price. So, it is obvious that management will always try to showcase the rosy picture in front of equity analysts. This is the simple reason behind my doubt on management visit. On the other hand, attending Annual General Meeting (AGM) is far more fruitful because you are not alone in AGM. There are huge numbers of investors and the entire management team to answer queries. Further attending conference call is more beneficial than company visit. After result announcement, most of the companies conduct conference call where various analysts can interact with management directly. Different types of questions from different analysts and answer from management offer a clear picture.
At the same time, I can understand that attending every AGM or conference call is not possible for retail investors. Millions of small investors are there in small towns, far away from metropolitan cities. How do they attend the meetings?
How to evaluate the management – Alternate way
I am going to present the easiest method to get an idea of management credibility. From the comfort of your home, one can evaluate those simple and easy-to-understand methods. Only three inputs are required for our purpose –
- Shareholding Pattern
- Dividend History and Tax Rate
- Return on Equity (ROE)
First of all, let’s have a look at the ease of availability of those data. With the advent of the Internet, such data are no longer far away from retail investors. Every listed company submit their shareholding pattern to their respective stock exchange. It is mandatory for all companies to disclose shareholding pattern at the end of every quarter. So you can find shareholding pattern for any listed company from BSE website (www.bseindia.com). Promoters or institutional investors purchase stocks via “block deal” or “bulk deal” from the open market. It is also mandatory to disclose any such deal. So at the end of the trading day you can easily access such data from the exchange website. Return on Equity (ROE) and the tax rate is also easily accessible from the financials of the company. The amount of Tax paid is mentioned separately. For ROE, it requires basic calculation. However calculated ROE is readily available on any financial website. So, it is not required to calculate on your own. Dividend history is also readily available on BSE or NSE website. You can access the last 10 years dividend history by a single click.
So, all those parameters for evaluating the management are readily available in our hand. You just need desktop/laptop with internet connection. That’s it.