The 1 Thing to Know About Clean Energy Fuels

I know it sounds ludicrous, but investors often overlook the people in charge of protecting their investments. The idea of gauging a company's leadership plays second-fiddle to other categories of analysis. However, at Fool.com we believe careful study of effective leadership is one of the most important areas of evaluating long-term winning investments.

We like CEOs who actually work for shareholders like us. After all, we're the true owners of the business. When you're deciding whether to invest in a company, failing to vet its CEO is a big mistake. In fact, if you've overlooked the study of a company's leadership, then that's the one important area you should know about before finalizing your investment in the company.

After reviewing thousands of companies over dozens of years, we've found several crucial characteristics of quality management. Today, we'll size up the recent performance of Clean Energy Fuels' (Nasdaq: CLNE) leadership.

How much skin do they have in the game?
Are Clean Energy Fuels CEO Andrew Littlefair's interests aligned with shareholders? Here's how the Clean Energy Fuels CEO's ownership compares to that of other companies offering transportation fuels:

Source: Capital IQ, a division of Standard & Poor's.

Littlefair actually owns $8 million worth of Clean Energy Fuels, or 0.89% of shares outstanding. We Fools prefer CEOs who have higher ownership stakes in their businesses, since that better aligns their interests with shareholders'. However, while we think high insider ownership is a good sign, low insider ownership isn't necessarily a bad one. CEOs may be relatively new, or may have a low percent of shares outstanding, but a high total value of ownership.

How well are they using your money?
Return on equity can help investors determine how adeptly management gets the job done. This metric combines how well management is expanding profitability, managing assets, and using financial leverage, all in one ratio. While return on equity isn't foolproof -- managers can manipulate it with excessive leverage, for example -- it does an excellent job of suggesting how effective managers are, and how well they can generate high returns on investors' capital.

Here's a look at Clean Energy Fuels' recent return on equity:

Despite difficult economic conditions, Clean Energy Fuels managed to grow return on equity beyond its five-year average. Consistently increasing return on equity suggests that management is either adept at cutting costs and managing assets, or is moving the company into new high-return areas. In the case of Clean Energy Fuels, the company is outperforming largely due to a massive derivates loss in 2006 that sunk ROE to extremely negative levels. In the past 12 months, ROE still stands at -14%. Management still has a ways to go before the company is showing outsized returns on capital.

How productive are their workers?
Revenue per employee provides another way to gauge a CEO's effectiveness. If this metric is declining, the company might have a bloated organizational structure, or too many extra employees toiling away at new initiatives that just aren't working out. Either possibility would hint that management isn't effectively running the organization.

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Clean Energy Fuels' revenue per employee has moved below its five-year average. This might mean that the company's hiring too many people, or spending too much. In 2009, revenues actually increased, so the decline is the result of a hiring binge. To better see whether Clean Energy Fuels' cost controls are actually deficient, let's compare the company to its peer group once again:

Source: Capital IQ, a division of Standard & Poor's. Dollar figures in thousands. *Information for 2005 wasn't available for CVR, so 2007 and 2009 totals are shown to illustrate recent trends.

Clean Energy Fuels' trailing its peer group in this category over the past five years. Shareholders should keep a wary eye on this red flag in the coming quarters. The company's scaling for growth, but investors should watch to make sure costs don't get out of line.

These are just a few of the factors we look for in a company's management. If you can find leaders who continually give shareholders high returns on their capital, and align their interests with yours, you've got a better chance to enjoy market-beating returns for the long haul.