Evaluating The Management Of A Business
“Buying an expensive business managed by an honest management fetches better results than one managed by suspicious people.” – Basant Maheshwari
In this section, the author tells us how to evaluate the company's management through various aspects of study, both financial and otherwise, which is as important as the business model.
Management can be evaluated in a variety of ways.
- The management's overconfidence can be seen if they bring a large number of IPOs from the group company. For example, Kishore Biyani's Future Group.
- Mergers or acquisitions of companies related to the promoters.
- Honest management always pays their taxes and maintains a healthy dividend payout.
Promoters in their first generation.
It is difficult for an investor to evaluate first generation promoters, one good way is to go through red herring prospectus and check the financials of the previous years to create an opinion on the ability of the management for long term execution.
Transparency in Annual Report.
The quality of disclosure in the annual report indicates the scale of transparency. For example, when the author bought Page Industries, he was worried about what if the management intends to get into backward integration planning of manufacturing yarn, to which management replied that they won’t undertake venture which gives it an incremental ROCE of less than 35% further adding they had 200 vendors to buy yarn from, then why should they enter in a crowded field.
People rarely change: Avoid management that was once suspect but is now showing a clean cheat.