This is a guest post from Marcel Spingorum from Market-Swings.com. Marcel writes about the management of company and importantly how investors can ensure that management demonstrate that they are aligned with shareholders’ interests.
The first and foremost task, of a company’s management is to create value for shareholders.
For example the management of a growth enterprise should reinvest net earnings back into the company if returns on retained earnings are large enough.
Conversely a large percentage of post-tax profits should be paid out in dividends if the company is unable to deliver a decent return on retained earnings.
Management should serve shareholders but, sadly, often they don’t.
Companies with large throves of cash count amongst prime examples of discounted enterprises.
The reason for this is that cash does not earn large returns whilst working capital that uses lines of credit can leverage the company to larger net profits.
A current example of a company with a large cash pile is Asian Citrus Holdings Ltd (ACHL.L)
ACHL sports a cash pile of some £215m versus a market capitalisation of £245m.
The liabilities ahead of the current assets are very small and consist mainly of trade payables.
In fact the share price of ACHL has declined so much, due to various location and operational factors, that the shares can now be classified as a Bona-Fide Benjamin Graham sub net working capital stock.
The company is profitable and generates good positive free cash flow.
The fault with the company obviously lies with the company’s management on an operational basis.
To restore investor confidence in the stock management should engage a share repurchase program which could be extensive given the cash reserves.
The repurchased shares, or the majority thereof, should be kept as treasury shares.
At some point in the future the share price will, hopefully, trade higher and when the company wants to make an acquisition it can then pay with the treasury stock thereby creating a bundle of value for shareholders.
It is inexcusable for any company that is in a similar position of ACHL not to repurchase their own shares as they are neglecting value creation for their owners.
Asian Citrus 5 Year Price Chart
Price chart courtesy of Yahoo! Finance
Sub cash shares, those that trade consistently below cash levels, may not be the bargain that they appear to be.
In order to invest in sub cash shares the company needs to feature other characteristics such as sales and profit growth and a good return on equity amongst other things.
Otherwise the shares are probably only worth the cash on their books.
The problem which exists then is a management problem and outside shareholders should move to replace current management if they are deemed incapable to create value for shareholders.
Management analysis is often neglected when investors research possible investments. However as this article shows management analysis is crucial in establishing whether or not a company is creating value for shareholders.
One final tip on establishing management credentials is to peruse director remuneration and options.
Remuneration should be benchmarked against the size of the company and the company’s industry.
Bonus points should be awarded if management take a pay cut and/or forego their bonuses during times of market turbulence.
Options should only be awarded during fair market conditions at prices at or above the prevailing share price.
Argo Limited (ARGO.L) is a great example as management awarded themselves options at 25p when the Argo share price was only around half that price.
Management should ensure to maximize shareholder value when the markets push share prices down.
They should not be trying to act in their own best interest.
Marcel has been a full time investor since 2005 when in his first year of professional trading he made over six times his old desk job salary. He currently runs www.Market-Swings.com, a stock market education website, which features a mentorship program, Skype lessons, a newsletter subscription, a free 75 page stock market eBook and much more.
According to Marcel many investors make simple mistakes which when corrected could make the investor multiples of their current investment returns. On this basis he likes to work with clients on a 1-2-1 basis, either on Skype or in the monthly mentorship program, in order to set a path for each client to maximize their profits.
“There are several mistakes that many investors make and I have found that by correcting these mistakes the investor immediately sees larger return on their investments”
Marcel currently resides in Cork, Ireland with his wife and three children. Investing is his work as well as his hobby.