Management Analysis

How To Do Management Analysis of a Company.

Most important criteria which determine the performance of a company is Management Quality. Management analysis is the most important parameter while analyzing a company. Management should be given more importance than any other parameters before putting your hard-earned money in any company.

It’s better to associate with a company which is run by honest people. “Management quality” plays a pivotal role in making money in stock market. A crook management will find many ways to cheat shareholders.

I avoid company where I find even the slightest sign of lack of integrity and honesty. Management analysis is a subjective topic, but it’s better to tick more boxes and see how the company stands on the management front. Whenever there are negative issues, it’s better to avoid such companies

Steps for Management Analysis:

1) Promoter’s Background Check:

We should check the profile of the promoters of the company. Promoters are the ones who are running the company.

Has the management of the company been punished by SEBI in the past?? Do they have past history of fooling the minority shareholders?? These are some question which I ask before investing.

A simple check about any past penalties, regulatory action if any taken can be obtained from public sources like Google.

2) Salary of Promoters:

Salary taken by promoter should be compared with the net profit of the company to get a good indication of the management quality.

Ideally, I look for a company whose management take a salary of 2-4% of the net profit. Anything above the set limit is a concern for me and will serve as a red flag.

3) Return generated in the Past:

This is an important responsibility of the management. How much money is invested in the company for its expansion and how much return it has generated in the past.

ROIC is the best indicator to check the ability of the management. Preferably, I look for a company which has generated an ROIC of more than 18% in past 7-10 years.

4) Related Party Transaction

Related Party Transaction is one section in the Annual Report which every investor should study in detail. It is summary of all the transaction done between the company and their joint ventures or sister companies where the promoters have a great influence.

Its great information where investors can conclude whether promoters are benefitting from the company at the cost of the minority shareholder.

5) Accounting Practise:

Check if the company has reported a false profit number to show that it is doing good. Many big companies have forged with the numbers in the past and have resulted in great loss of wealth for shareholders.

Here are few of the signs that there is an issue with the working of the company.

a) PAT > CFO from past years (Check for 7-10 years)

b) High Debt

c) Increasing Receivables Days

d) Frequent Acquisitions

e) Increasing Inventory

6) Promoter’s ShareHolding Pattern

High promoter’s shareholding in a company is a good indication and shows that the promoter has faith in the company.

How much should be the promoter holding in the company varies from investor to investor. I personally prefer company having a shareholding of more than 30% and which is increasing every year.

7) Past Execution Skills

Wheather management has completed the pending projects and increased its expansion is the best way to check its focus on the business.

It’s important to read past annual reports, read conference calls done by the management to know about its approach towards its business.

These were some of the points which I check before going ahead and buying shares of the company. I hope it has helped you in some or the other way.

Happy Investing!!!!!



About the author

Yash Birajdar

Hey I'm Yash Birajdar, an Engineer, Pistol Shooter and a Value Investor. I am here to learn and help readers with knowledge related to Value Investing In Stock Market in simple way.

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