Going beyond profit number!

While selecting a company for long-term investment, one factor that every investor should analyse is the quality of management. The reason behind this is that in good times, revenue will drive the business, but in bad times, it is the management that drives the company through the difficulties. Evaluating the management quality is not an easy task. But we can see how much value the management has created for the shareholders by analysing how efficiently the management allocates the company resources. Few points that can tell us about the management quality are checking the management remuneration policies. One should also check various return ratios like Return on Equity (RoE), Return on Capital Employed (RoCE) and Return on Invested Capital (RoIC) to see how efficiently the management has deployed company capital. Going a step deeper, one can read the previous management commentary in the past annual reports or analyst concall and compare it with the present scenario to check out whether the management has fulfilled their promises. Judging the management quality is not a simple straightforward task. But one can surely reach a workable level after some experience. There are many companies who have survived bad business cycle and increased the shareholder’s wealth because of good management quality. So the next time you invest, try to dig a bit deeper.