HOW ARE THE GAINS / PROFITS OF THE ORGANIZATION ? HOW IT MAY THRIVE IN FUTURE ?
INDUSTRY GROWTH
One way of examining a company's growth potential is to first examine whether the amount of customers in the overall market will grow. This is crucial because without new customers, a company has to steal market share in order to grow.
In some markets, there is zero or negative growth, a factor demanding careful consideration. For example, a manufacturing company dedicated solely to creating audio compact cassettes might have been very successful in the '70s, '80s and early '90s. However, that same company would probably have a rough time now due to the advent of newer technologies, such as CDs and MP3s. The current market for audio compact cassettes is only a fraction of what it was during the peak of its popularity.
THE MARKET PRICE VS EARNING YIELD / STOCK RATIO !
In some markets, there is zero or negative growth, a factor demanding careful consideration. For example, a manufacturing company dedicated solely to creating audio compact cassettes might have been very successful in the '70s, '80s and early '90s. However, that same company would probably have a rough time now due to the advent of newer technologies, such as CDs and MP3s. The current market for audio compact cassettes is only a fraction of what it was during the peak of its popularity.
THE MARKET PRICE VS EARNING YIELD / STOCK RATIO !
Understanding Price to Sales Ratio
You have a number of tools available to you when it comes to evaluating companies with earnings. The first three articles listed at the bottom of this article, in particular deal with earnings directly. You can add the two others on dividends and the one on return on equity to the list as specific to companies that are or have made money in the past.
Does that mean companies that don’t have any earnings are bad investments? Not necessarily, but you should approach companies with no history of actually making money with caution.
The Internet boom of the late 1990s was a classic example of hundreds of companies coming to the market with no history of earning – some of them didn’t even have products yet. Fortunately, that’s behind us.
However, we still have the problem of needing some measure of young companies with no earnings, yet worthy of consideration. After all, Microsoft had no earnings at one point in its corporate life.
One ratio you can use is Price to Sales or P/S ratio. This metric looks at the current stock price relative to the total sales per share. You calculate the P/S by dividing the market cap of the stock by the total revenues of the company.
You can also calculate the P/S by dividing the current stock price by the sales per share.
WHO IS CALLED MANAGEMENT ?
The team of persons organizing a concern is called Management. They are
1) Promoters,
2) C.E.O. (CHIEF EXECUTIVE OFFICER ),
3) Chairman,
4) Managing Director and
5) Board of Directors.
Generally qualified Managements hold certain principles within themselves. They are,
1) Satisfied Customer service,
2) Prompt Tax payers ( Not misusing Tax )
3) Quality in Produced products,
4) Refusing Bribery,
5) Pertaining to Law, behaving Truly,
6) Considering Employees Welfare,
7) Not swallowing Huge salary as they wish, etc….. can be mentioned continuously.
If we consider only a scale, Quality in Management we can realize the truth that many concerns in India are not maintaining Quality. Merely we can reject all those. Quality is famine in Indian companies. For example:- Real Estate companies ( Infrastructures ). Tata group of Companies, H.D.F.C. Group, Infosys, Mahindra & Mahindra, and some, public sector companies stand erect, because of the belief in people.
Companies like TATA, not ready to offer Bribe , missed some sectors. Even in Tamilnadu, due to the price hike of Real Estates ( Infrastructure ) TATA Group avoided its plan of commissioning a plant. H.D.F.C Group stocks at anytime being at Highest prices are due to their Qualified Management and Frankness.
In
order to execute a business plan, a company requires top-quality management.
Just as an army needs a general to lead it to victory, a company relies upon
management to steer it towards financial success.
So how does an average investor go about evaluating the management of a company?
This is one of the areas in which individuals are truly at a disadvantage compared to professional investors. You can't set up a meeting with management if you want to invest a few thousand dollars. On the other hand, if you are a fund manager interested in investing millions of dollars, there is a good chance you can schedule a face-to-face meeting with the upper brass of the firm.
Every public company has a corporate information section on its website. Usually there will be a quick biography on each executive with their employment history, educational background and any applicable achievements. Don't expect to find anything useful here. Let's be honest: We're looking for dirt, and no company is going to put negative information on its corporate website.
Instead, here are a few ways for you to get a feel for management:
1. Conference Calls
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) host quarterly conference calls. (Sometimes you'll get other executives as well.) The first portion of the call is management basically reading off the financial results. What is really interesting is the question-and-answer portion of the call. This is when the line is open for analysts to call in and ask management direct questions. Answers here can be revealing about the company, but more importantly, listen for candor. Do they avoid questions, like politicians, or do they provide forthright answers?
2. Management Discussion and Analysis (MD& A)
The Management Discussion and Analysis is found at the beginning of the annual report (discussed in more detail already in this tutorial). In theory, the MD&A is supposed to be frank commentary on the management's outlook. Sometimes the content is worthwhile, other times it's boilerplate. One tip is to compare what management said in past years with what they are saying now. Is it the same material rehashed? Have strategies actually been implemented? If possible, sit down and read the last five years of MD&As; it can be illuminating.
3. Ownership and Insider Sales
Just about any large company will compensate executives with a combination of cash, restricted stock and options. While there are problems with stock options (See Putting Management Under the Microscope), it is a positive sign that members of management are also shareholders. The ideal situation is when the founder of the company is still in charge. Examples include Bill Gates (in the '80s and '90s), Michael Dell and Warren Buffett. When you know that a majority of management's wealth is in the stock, you can have confidence that they will do the right thing. As well, it's worth checking out if management has been selling its stock. This has to be filed with the Securities and Exchange Commission (SEC), so it's publicly available information. Talk is cheap - think twice if you see management unloading all of its shares while saying something else in the media.
4. Past Performance
Another good way to get a feel for management capability is to check and see how executives have done at other companies in the past. You can normally find biographies of top executives on company web sites. Identify the companies they worked at in the past and do a search on those companies and their performance.
You have a number of tools available to you when it comes to evaluating companies with earnings. The first three articles listed at the bottom of this article, in particular deal with earnings directly. You can add the two others on dividends and the one on return on equity to the list as specific to companies that are or have made money in the past.
Does that mean companies that don’t have any earnings are bad investments? Not necessarily, but you should approach companies with no history of actually making money with caution.
The Internet boom of the late 1990s was a classic example of hundreds of companies coming to the market with no history of earning – some of them didn’t even have products yet. Fortunately, that’s behind us.
However, we still have the problem of needing some measure of young companies with no earnings, yet worthy of consideration. After all, Microsoft had no earnings at one point in its corporate life.
One ratio you can use is Price to Sales or P/S ratio. This metric looks at the current stock price relative to the total sales per share. You calculate the P/S by dividing the market cap of the stock by the total revenues of the company.
You can also calculate the P/S by dividing the current stock price by the sales per share.
WHO IS CALLED MANAGEMENT ?
The team of persons organizing a concern is called Management. They are
1) Promoters,
2) C.E.O. (CHIEF EXECUTIVE OFFICER ),
3) Chairman,
4) Managing Director and
5) Board of Directors.
Generally qualified Managements hold certain principles within themselves. They are,
1) Satisfied Customer service,
2) Prompt Tax payers ( Not misusing Tax )
3) Quality in Produced products,
4) Refusing Bribery,
5) Pertaining to Law, behaving Truly,
6) Considering Employees Welfare,
7) Not swallowing Huge salary as they wish, etc….. can be mentioned continuously.
If we consider only a scale, Quality in Management we can realize the truth that many concerns in India are not maintaining Quality. Merely we can reject all those. Quality is famine in Indian companies. For example:- Real Estate companies ( Infrastructures ). Tata group of Companies, H.D.F.C. Group, Infosys, Mahindra & Mahindra, and some, public sector companies stand erect, because of the belief in people.
Companies like TATA, not ready to offer Bribe , missed some sectors. Even in Tamilnadu, due to the price hike of Real Estates ( Infrastructure ) TATA Group avoided its plan of commissioning a plant. H.D.F.C Group stocks at anytime being at Highest prices are due to their Qualified Management and Frankness.
QUALITY OF MANAGEMENT
After Analyzing Economy and sectors, the various factors
required to purchase a stock are,
(i) Trusted
Management,
(ii) Efficient and
Impartial characteristics.
How a government is important for a country, likewise a head
of the family for the house, a teacher for a class, similarly to that much level,
a management is very important.
In
order to execute a business plan, a company requires top-quality management.
Just as an army needs a general to lead it to victory, a company relies upon
management to steer it towards financial success.
Investors might look at management to assess their capabilities,
strengths and weaknesses. Some believe that management is the most important aspect for investing in
a company.
Even the best-laid plans in
the most dynamic industries can go to waste with bad management (AMD in
semiconductors).
Alternatively, even strong
management can make for extraordinary success in a mature industry (Alcoa in
aluminum). Some of the questions to ask might include:
How talented is the
management team?
Do
they have a track record ?
How
long have they worked together ?
Can
management deliver on its promises?
If
management is a problem, it is sometimes best to move on.
It makes sense - even the
best business model is doomed if the leaders of the company fail to properly
execute the plan.
So how does an average investor go about evaluating the management of a company?
This is one of the areas in which individuals are truly at a disadvantage compared to professional investors. You can't set up a meeting with management if you want to invest a few thousand dollars. On the other hand, if you are a fund manager interested in investing millions of dollars, there is a good chance you can schedule a face-to-face meeting with the upper brass of the firm.
Every public company has a corporate information section on its website. Usually there will be a quick biography on each executive with their employment history, educational background and any applicable achievements. Don't expect to find anything useful here. Let's be honest: We're looking for dirt, and no company is going to put negative information on its corporate website.
Instead, here are a few ways for you to get a feel for management:
1. Conference Calls
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) host quarterly conference calls. (Sometimes you'll get other executives as well.) The first portion of the call is management basically reading off the financial results. What is really interesting is the question-and-answer portion of the call. This is when the line is open for analysts to call in and ask management direct questions. Answers here can be revealing about the company, but more importantly, listen for candor. Do they avoid questions, like politicians, or do they provide forthright answers?
2. Management Discussion and Analysis (MD& A)
The Management Discussion and Analysis is found at the beginning of the annual report (discussed in more detail already in this tutorial). In theory, the MD&A is supposed to be frank commentary on the management's outlook. Sometimes the content is worthwhile, other times it's boilerplate. One tip is to compare what management said in past years with what they are saying now. Is it the same material rehashed? Have strategies actually been implemented? If possible, sit down and read the last five years of MD&As; it can be illuminating.
3. Ownership and Insider Sales
Just about any large company will compensate executives with a combination of cash, restricted stock and options. While there are problems with stock options (See Putting Management Under the Microscope), it is a positive sign that members of management are also shareholders. The ideal situation is when the founder of the company is still in charge. Examples include Bill Gates (in the '80s and '90s), Michael Dell and Warren Buffett. When you know that a majority of management's wealth is in the stock, you can have confidence that they will do the right thing. As well, it's worth checking out if management has been selling its stock. This has to be filed with the Securities and Exchange Commission (SEC), so it's publicly available information. Talk is cheap - think twice if you see management unloading all of its shares while saying something else in the media.
4. Past Performance
Another good way to get a feel for management capability is to check and see how executives have done at other companies in the past. You can normally find biographies of top executives on company web sites. Identify the companies they worked at in the past and do a search on those companies and their performance.
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