Does the Company have Solid Management
Any good company should have good system running the entire organization. When a company has a good business system, management efficiency may not be the most important factor. Take Chrysler Corporation for example. It was struggling years ago before Lee Iococca took over and turned it around to become a solid car manufacturer. But after Lee Iococca retired, Chrysler went back into mediocracy.
Now, we do not want to go into any companies or toxic industries and expect a Super CEO to turn it around. If you have followed my filters, you should already have AWESOME companies in your watch list. But I always like good companies to also have excellent management so that my chances of success as an investor is tripled. And to do that, I like to look for solid companies with solid management.
A good company with average management team will continue to do well even in bad economies. But why do we need to settle for 2nd best? There’s no reason to do that. Can you imagine what might have happened if you have a good company with good products and services and on top of that you have a world class management team watching them? BOOM! Only good things will happen and the good things that happen to that company will be reflected in the stock price.
And as value investors that is we should look for. Good companies with solid track record and backed by solid management team. So how to do find out if the management team is doing a good job?
ROE Ratio – 3 years or More at 25% ideally
Again, I promised to make things easy and simple. So here’s the key ratio I use to filter out companies with good management. Go to financial statements of companies and look for ROE which is the acronym of Return On Equity. Basically just the net income over shareholder’s equity to get the ROE. This is the measurement to understand how much net income that the company generates and it is a reflection on how efficient management can be.
Good management should be able to produce ROE of at least 18% per year. I will look at the companies ROE for at least 3 years. 18% is the minimum but ideally it should be at 25% per year and that’s what great companies are all about.
If you can have this filter together with the others for screening purpose, you should end up with great companies that are worthy of your hard earned money.