How to Check Management Quality Before Buying Stocks in a Company?

A look at the parameters to check while evaluating the management quality of a company

Evaluate the Management Quality

Someone starting in equity investments may get overwhelmed by the financial numbers and the jargon. But these are things that you can study and master after a while. But before buying stocks you also need to evaluate things that are much more subtle, and open to interpretation. Take an assessment of the company’s management quality, for instance.

The four Cs of capability, candidness, commitment and compassion are often used to evaluate the quality of an executive team in a company. Together these 4Cs combine to form the fifth C, i.e. the culture of the company.

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Capability – The capability of the management team is defined by its chief executives. You can check their achievements, qualifications, and work experience. You can understand their future strategy by researching the management discussions, quarterly earning calls, press releases etc. Also, check how they are applying the capital and on what? Acquisitions, stock buyouts, and expansion strategy are the capital allocation efficiency parameters that you must monitor. Similarly, analyse how well is their debt management, their current debt position and repayments. 

Commitment – The commitment of the management is reflected in the long-term value that they are creating for their shareholders. How much of the wage bill is made up of management compensation, are executive salaries in line with company performance? Also, find out how invested are the executives in the company. Key officers investing in the company is a sign that they are committed to the company’s long-term growth. A similar interpretation can be made if the company has a high promoter holding percentage. You must also monitor the related party transactions made by the company. A management team that misuses these transactions cannot be fully committed to the welfare of the company. Warnings signs include the unusually low-priced sale of assets or interest-free loans to related parties or overpriced purchases from them.

Candidness – You can check the candidness of the management from what they say, and don’t say, in the official publications and press releases. A recent crisis in the company – were they upfront about it in the annual report? Are they achieving what they have promised in the past? Is there any cohesion between what they disclose and the goings-on in the company? 

Compassion – While buying stocks do note that compassion has a defining role in the company’s culture. Is it a good place to work? How well does it treat its employees? Companies that take care of their employees and stakeholders are often the ones that perform well in the financial parameters as well.

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Evaluating the management based on these parameters needs very careful observation and analytical skills. However, these parameters are just as crucial in evaluating a company as are its financial and operational achievements.

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