You probably know that it's very important to make sure that a company you're investing in has high-quality management. But if you're like most investors, you're probably a bit stumped on how exactly to assess a company's management. Fortunately, you don't need to be a well-connected bigwig in order to glean some quality impressions.
Ordinary financial statements can help you discern whether a company's management is on the ball. Dig out the company's annual report or its latest earnings report and look at the balance sheet. Is there more long-term debt than cash? Many companies carry a lot of debt successfully, but you could look into whether management is borrowing more than it can pay.
Look at the income statement and compare numbers over the past few years. Have sales and earnings been growing consistently? A smooth upward trend suggests that management has been planning well, encountering few surprises.
A growing operating margin is another sign of high quality, showing that the firm is working on wringing more and more profit from each dollar of sales. In a period of slowing sales growth, savvy managers can maintain earnings growth momentum by increasing margins. To boost margins, management has to run its business more efficiently, decreasing expenses such as the cost of supplies or employee salaries.
One of the best barometers of management excellence is a company's return on equity (ROE). It measures how well the company is using its reinvested earnings to generate additional income. Here's a short series of articles dissecting ROE and an article on ROE and ROA (return on assets).
Another great resource is this collection of articles on how to evaluate management.
Invest in companies only after you make sure their highly compensated executives are earning their keep.
By the way, if you're interested in some companies that our analysts believe are very promising investments, check out our newsletters and research products! One newsletter to consider is Fool co-founders David and Tom Gardner's Motley Fool Stock Advisor. Each month, it delivers stock ideas from the brothers that you can mull over or act on, plus some educational commentary. And a brand new newsletter, focusing on smaller companies, is Tom Gardner's Motley Fool Hidden Gems. Check these out!
For more personal finance and investing basics, visit our Personal Finance area, our Investing Basics area, and our Fool's School. You can also learn a lot via our acclaimed How-to Guides and online seminars and our book, The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing .
