Company, by classification, is an artificial person, shaped by law and has long-lasting subsistence. Therefore, organizations need to be structure and method determined rather than individuals driven. Consequently, there has to be a clear ladder of choice making in an organization and it should not be reliant on one or two individuals. If organization is reliant on one or two people, there is also threat to investors called “Key man, if key one or more individuals are not there tomorrow”.
Market analyst should pay consideration to how do the decision making progression works in the organization. Is the company a single man exhibition or driven by a team of professionals based on definite process and systems?
Is there clear chain of plans in place for key position?
These characteristic, whilst missing in most of the reports today, would play significant position in future success or failure of businesses.
What are the significant Business Drivers/Success Factors?
Each industry/segment has an explicit set of factors which influence its success and prediction. For instance
Retail segment intimately observes falls and same store sales (SSS)
Banking works on Net Interest Income (NII)/ Net Interest Margin (NIM)
Telecom negotiations rotate approximately Average Revenue Per User (ARPU)
Hotels focus on average room tariffs and tenancy points.
Currency levels are important for export oriented IT companies and import oriented oil companies
On-line businesses are reliant on internet access and changing behaviour of people on shopping
Additional, any small change in the industry make-up can set off noteworthy change in the industry forecast. For instance, in the General Budget of 2014, a statement improved the definition of ‘Long Term’ from 1 year to 3 years for calculating capital gains on units of debt Mutual funds units and unexpectedly the way the industry was selling this product distorted. This one characteristic, consequential in change in taxation rule for Debt Mutual Funds, has led to investors and distributors shying away from this product. Mutual funds are reinventing by them on this product to get the investors back.
Buying a company’s shares lacking having information of these significant drivers could mean purchasing a likely loser. Analysts should be able to put their ideology on significant drivers of an industry and analyze them in great detail for the business under contemplation.
What are the Risks in the Business?
Promoters care for to talk of the grand future they vision and create in your mind. Very infrequently would they talk about the threat linked with the expedition of changing their vision into a reality? For instance, borrowing from the international market at low rates looks attractive; on the other hand, adding the viewpoint of currency risk to the talk turns the whole discussion on its head.
Entrepreneurs are by nature risk takers and have the psychological ability to bear shocks. Ruper Mudroch failed thrice before he successfully created the Star Empire. Steve Jobs was thrown out of ‘Apple’ his own company and later was called back. In the meantime, he started another successful venture! While businessmen would be able to bear these risks, not all investors would.
There are risks in every business, which may range from business aspects to operational aspects to execution aspect and others. The risks may be apparent and known or they may be unknown.
Analysts should spotlight a lot on the risk feature in a range of dimensions of the businesses. They should incessantly enquire “What could go wrong in the business”. If promoters state that nothing could go wrong in the business, obviously they go down in to the class of “people who don’t know that they don’t know”. These type of promoters need to be shun. A good businessman would always have cognizance of the risks in the business and the steps that need to be taken to defend the business from their things.
What is the Compliance Orientation of the Company?
At present, by guideline, having a compliance officer in the company is a must. Likewise, pronouncing results every quarter, giving particulars of share-holding blueprint, handling investors’ complaints in an proper method, revealing allotment of money raised from investors in an IPO/FPO, on condition that in sequence on the modification in the management’s shareholding in the company, among others are all accepted to be carried out by regulation and are a division of compliance needs. A few companies are very compliance adjusted and go behind rules and regulations in words and spirit.
However, most companies pay no awareness of to the subject and are frequently pulled by regulators/exchanges and other regulatory and government bodies for non-compliances.
History of compliances by the company should be a division of checklist for the analysts. According to Warren Buffet : Honesty is a very expensive gift, don’t expect it from cheap people.