The management thinking can be best understood by reading the management discussion and analysis mentioned in the annual report. One can start with reading three year’s annual reports. This will allow you to compare the management analysis from past reports with what really transpired in the following year. The next important thing that will help you is the corporate governance details in the annual report.
“Management’s intentions towards the minority shareholders must be carefully understood,” advises Kunj Bansal, chief investment officer of Sanlam SMC India. If the business has just been sold, the promoters collecting a non-compete fee does not bode well for smaller shareholders.
Some investors find buy back programmes done at suppressed stock prices and unrelated diversifications detrimental to the minority shareholders. Management actions in the past while handling surplus cash can be good signalling device. One quantitative element that comes handy is the quantum of management compensation. One can look at payout to the management as a percentage of the net profit and decide if the management is fair.
“Management’s intentions towards the minority shareholders must be carefully understood,” advises Kunj Bansal, chief investment officer of Sanlam SMC India. If the business has just been sold, the promoters collecting a non-compete fee does not bode well for smaller shareholders.
Some investors find buy back programmes done at suppressed stock prices and unrelated diversifications detrimental to the minority shareholders. Management actions in the past while handling surplus cash can be good signalling device. One quantitative element that comes handy is the quantum of management compensation. One can look at payout to the management as a percentage of the net profit and decide if the management is fair.
Related Party Transactions
Good companies do business with related parties at fair market prices. The same is disclosed in the annual report for the benefit of the shareholders. Few related party transactions, along with high transparency, is an indicator of a good business. Promoters’ presence in the same business through a privately-held entity is a clear dampener as the investor in the publicly-listed entity runs the risk of promoter placing the ‘cream business’ in the privately-held entity.
Business model
Simply put, it means where and how the company earns its bread and butter. You have to figure out what products the company produces or markets. Five Ws — who, when, where, what, why, will help you understand the raw materials that go in, the time and skill set required, the risks faced by the company and probably all those variables that can influence your returns as a shareholder.
During tech boom of 2000, investors poured in their hard earned money into hundreds of dotcom companies. A few avoided these companies as they found that there were no meaningful revenues or they were bleeding at operational level. Undoubtedly those who stayed clear of that boom were the eventual winners. A thorough understanding of the business can help determine the potential of business and the risks the business is subject to.
Business model
Simply put, it means where and how the company earns its bread and butter. You have to figure out what products the company produces or markets. Five Ws — who, when, where, what, why, will help you understand the raw materials that go in, the time and skill set required, the risks faced by the company and probably all those variables that can influence your returns as a shareholder.
During tech boom of 2000, investors poured in their hard earned money into hundreds of dotcom companies. A few avoided these companies as they found that there were no meaningful revenues or they were bleeding at operational level. Undoubtedly those who stayed clear of that boom were the eventual winners. A thorough understanding of the business can help determine the potential of business and the risks the business is subject to.
Pricing Power
If you grasp the business model well, you stand to understand the pricing power. Customers and suppliers can influence the profit if they possess the pricing power. Generally, businesses with a few customers or sole suppliers typically do not have pricing power. Hence it makes sense to stay with companies that have a large customer base and have many suppliers and still a monopoly player in the business.
Power of intangibles
Intangibles such as brands play a significant role in the performance of a company. In the long-run, consumer preferences tilted in favour of a brand can bring in high visibility of income for a business. Intellectual property rights are also important as they offer an edge over others. They become the deciding factors in the knowledge-driven businesses.
“Investors must check the ownership of such intangibles. If the promoters own the brands in the personal capacity, then it is a case of promoters making money at the expense of the shareholders,” says Avinash Gorakshkar. This is especially true if the business is doing well, as the promoter can take home a sizeable amount of profits by way of higher fees.
Power of intangibles
Intangibles such as brands play a significant role in the performance of a company. In the long-run, consumer preferences tilted in favour of a brand can bring in high visibility of income for a business. Intellectual property rights are also important as they offer an edge over others. They become the deciding factors in the knowledge-driven businesses.
“Investors must check the ownership of such intangibles. If the promoters own the brands in the personal capacity, then it is a case of promoters making money at the expense of the shareholders,” says Avinash Gorakshkar. This is especially true if the business is doing well, as the promoter can take home a sizeable amount of profits by way of higher fees.
Point of Reference: Information Sources
Company annual reports:
--> An annual communication to shareholders
--> Available to all shareholders
--> High authenticity
--> Good companies also keep them on their websites
--> An annual communication to shareholders
--> Available to all shareholders
--> High authenticity
--> Good companies also keep them on their websites
Broker reports:
--> Prepared by brokers to solicit business and advise clients
--> Can be helpful in understanding micro or company-specific issues
--> May contain scenario analysis that exhibits impacts of changes in fundamentals
Company presentations:
--> These are prepared by companies from time to time
--> Meant for analysts and give update on business
--> You have to discount the contents as company may paint an overoptimistic picture
--> Available on company websites
--> Prepared by brokers to solicit business and advise clients
--> Can be helpful in understanding micro or company-specific issues
--> May contain scenario analysis that exhibits impacts of changes in fundamentals
Company presentations:
--> These are prepared by companies from time to time
--> Meant for analysts and give update on business
--> You have to discount the contents as company may paint an overoptimistic picture
--> Available on company websites
Industry reports:
--> Prepared by consulting firms and industry bodies such as FICCI
--> Offers good business insights
--> Useful in tracking changes in regulatory, technological changes
--> Available on websites of industry bodies or websites of manufacturers
--> You have to discount the interested parties' views
Stock exchange filings:
--> Periodic communications by the company
--> High authenticity
--> Prepared by consulting firms and industry bodies such as FICCI
--> Offers good business insights
--> Useful in tracking changes in regulatory, technological changes
--> Available on websites of industry bodies or websites of manufacturers
--> You have to discount the interested parties' views
Stock exchange filings:
--> Periodic communications by the company
--> High authenticity
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