FA 101: 5 Frequently Overlooked Things

FA 101: 5 Frequently Overlooked Things

This column is written by @gordon_ong.

-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.

When we talk about the fundamentals of the company, we frequently focus on the qualitative aspects (macro situation and industry outlook) and the quantitative aspects (financial statements, ratios and valuation). Caught up in the financial data, we sometimes forget that companies are still run by management teams, who have varying degrees of competency and have their own personal interests in mind. Here is a checklist to ensure that management is working their hardest to deliver value to you, the shareholder.

As retail investors, we are not privy to insider information like Warren Buffet. Hence, we should strive to be like Walter Schloss, a master at extracting information from public sources. That includes assessing management based on public information.

Management – Assessing for Competency and Integrity

The most important thing is to assess management for its competency and integrity. Here are a few ways you can do it:

1. Quarterly Reports and News Release – read the news release and the quarterly report in tandem. Assess whether management highlights only the good aspects of the quarter’s financial performance, and whether management practices candour.

2. Management Discussion & Analysis (MD&A) – read the chairman’s statement at the front of the annual report, which discusses the year’s progress. Management will also touch on upcoming year, outlining future goals and new directions. Note: this is unaudited. Assess it based on whether it provides sufficient disclosure.

• How candid and accurate are management’s comments?

• How clear are management’s comments? If they are loaded with jargon, perhaps they have something to hide. [See: TT Durai’s NKF Scandal]

• Does management discuss significant business plans over the past couple years? (compare the MD&As over the last few years to see how the message has changed and whether management followed through with their plans.)

• Do they mention potential risks or uncertainties moving forward? Do they try to give unreasonable justifications to downplay risks? [See: Wells Fargo Scandal]

• Do they ignore risks that you find significant in the financial statements?

3. Ownership and Insider Sales

• Compensation (annual proxy statement) – is pay aligned with performance? If executive compensation increases while performance falls, management may not be working in interest of shareholders.

• Employee stock options (ESOs) – watch out for companies that 1) offer a lot of ESOs to executives, and 2) re-price their ESOs in response to a stock price fall, or 3) issue ESOs at 52-week low strike price.

.

.

button_continue-reading-3

Leave a Reply

Your email address will not be published. Required fields are marked *