What You Must Know About Atheros

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 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 Atheros Communications' (Nasdaq: ATHR  ) leadership.

How much skin do they have in the game?
Are Atheros CEO Craig Barratt's interests aligned with shareholders? Here's how the Atheros CEO's ownership compares to that of his peers.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value (in millions)

Craig Barratt, Atheros

112,971

0.16%

$4

Scott McGregor, Broadcom

379,139

0.07%

$17

David Aldrich, Skyworks Solutions

387,611

0.22%

$10

T. Rodgers, Cypress Semiconductor

6,758,457

4.07%

$107

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

Barratt actually owns $4 million worth of Atheros, or 0.16% of shares outstanding. We prefer seeing CEOs who have a higher ownership in their businesses. This aligns their interests with shareholders. It's worth noting however that while we regard high inside ownership as a positive sign, having low inside ownership shouldn't necessarily be a red flag. 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 Atheros' recent return on equity:

Despite difficult economic conditions, Atheros has managed to grow return on equity over its five-year average. That's speaks well of management, and shows that the company has continued finding ways to increase returns on shareholder capital. Consistently increasing return on equity shows that management is either adept at cutting costs and managing assets, or is moving the company into new high-return areas.

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, Atheros' revenue per employee has declined against its five-year average. This is sometimes a red flag of excessive hiring and costs. To better see whether cost controls are actually deficient, let's compare the company to its peer group once again:

Company

2006

2010

Last Year vs. 5-Year Average

Annual Average Change

Atheros

$561

$475

$417

(11%)

Broadcom (Nasdaq: BRCM  )

$623

$595

$583

(7%)

Skyworks Solutions (Nasdaq: SWKS  )

$198

$225

$243

9%

Cypress Semiconductor (Nasdaq: CY  )

$211

$104

$187

12%

Source: Capital IQ, a division of Standard & Poor's. Dollar figures in thousands.

Atheros' revenue per employee is not only shrinking, but the company is also trailing its peer group in this category over the past five years. Given this, it appears Craig Barratt hasn't controlled his organizational structure as well as peers recently. Shareholders should watch this red flag in coming years.

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.

Jeremy Phillips owns no shares of the companies mentioned in this article. Cypress Semiconductor is a Motley Fool Rule Breakers recommendation. Atheros Communications is a Motley Fool Hidden Gems selection. The Fool owns shares of Atheros Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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