February 2020 – Stefania Gaggini, Senior Analyst, KNET Project
In PART I of the series we covered the reasons why good management is key to boosting the value of your company. This second part will take you through how we incorporate the role of management into a valuation.
As analysts we investigate management strategies that generate value. Here are some of the aspects that we look for in a management team when valuating companies.
When looking at hard skills we want to know the following:
- Does the management team understand economic factors and how they affect ROI (return on investment) drivers?
- Are they aware of the areas in which the business is more susceptible?
- Do they have a clear strategy to sustain high ROI or increase its ROI?
- Do they understand how their potential investments might affect sales, profit margins, asset turnover and overall expense ratios?
- Moreover, does the management team understand the forces of competition that cause ROI to decline and is it able to counter the forces and endure a high ROI?
When looking at soft skills side, we analyze the following:
Has the management team set-up standard operating procedures and practices which are properly communicated to all employees and implemented throughout the business?
- Do they run regular internal and external audits?
- Do they clearly outline roles, job descriptions and the division of work?
- And, does the management team run surveys and ask for feedback from all employees.
These are just a few of the aspects that a good financial analysis will cover in order to assess a company in the most transparent and accurate way.