“I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.” – Warren Buffett
One of the most common misconceptions when it comes to investing, is that a company’s financial numbers matter above everything else.
This also explains why most people stay away from any form of investment
– for their the sheer fear of numbers.
However, this cannot be further away from the truth.
In fact, the financial numbers should be one of the last things investors look at before investing into a company.
You see, most investors out there usually miss the main point.
A business can have a future as bright as day.
Their products can be the best among the rest, and they can be making millions year after year.
But what happens when the management decides to get a little more comfortable on their chairs and decide to stop pushing for more business growth?
Things are fine the way it is anyway.
Or what if the management decides that they deserve to earn more even though the business is not doing well?
And they come up with all sorts of sleight of hand to get more moolah into their pockets?
What happens to your investment then?
Most people do not realize that when it comes to investing, the key driver of a business is ALWAYS the management.
Whether the business grow organically or inorganically…
Whether they expand overseas or not…
Whether they come up with new products or not…
The decision ALWAYS falls into the hands of the management team.
A great management team is one who would work hard on improving the business, continue creating great value for society
and of course, making great fortune for their shareholders.
And then, there’s the question of integrity.
Bear in mind that a smart management could do everything right, and quite frankly, there are plenty of them to go around.
However, it is getting increasingly difficult to come across a management team who would make a great fortune for shareholders
AND to be completely candid about it, without even thinking of having any tricks up their sleeves to outsmart the shareholders.
So, what should we look for in a management team then?
Recently, NUS Professor and Vice Dean of NUS Business School, Mr Mak Yuen Teen published a great article titled “Avoiding Potholes in Listed Companies”
An advocate of corporate governance, Mak made it his mission to provide retail investors with useful tips and wave the red flag.
Things like poor director attendance at board and committee meetings, frequent turnover of senior management and inexplicable changes in financial statement – these are only some of the things that he would highlight to investors as a warning.
This information, however, are sometimes not available to the general public and while Mak does his best to warn as many people as he could,
there are still many people who are kept in the dark about what goes on behind the curtains.
That’s the key reason which drove the team to create the WP Rating function about half a year ago.
Made to highlight and assess 13 points of business risks, WP Rating helps investors to detect looming risks caused by the actions from management teams
one of the most common ones being the “One-Off Item Management”
One-Off Items refers to gains, losses or expenses that happens only once and will not affect the earnings in the future.
Therefore, the gains, losses or expenses are not considered to be part of the company’s core business operations.
It could be the purchase of a new store, the sale of an equipment or the acquisition of a new subsidiary.
The possibilities are endless.
Some companies, however, may pass off the amount made from these transactions as a part of their revenue.
To draw an example, Starbucks’s One-Off Item Management is currently in the yellow, after taking into account their latest annual report.
And if we refer to their income statement, we would see they earned a fair bit from their One-Off Items last year.
After a quick check, we found the source of the gain – an acquisition and a net gain resulting from divestiture in parts of their operations, which are acceptable reasons.
Take note though, that this only happened once to Starbucks and the amount was not too substantial unlike some other companies, so it is not a major red flag.
In some cases however, you would see that their one-off items slowly becomes all too frequent and the amount increasing to an amount so substantial,
that it actually overtakes their normal earnings.
That’s like Starbucks earning most of their income by acquiring and selling companies and joint ventures every year, instead of selling coffee!
And when this happens, make sure that you’re the first to know so you can be out the door as soon as possible.
Curious about other companies now that you learned more about one-off items?
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Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author(s) involved in the writing of this piece do not have current vested interest of the company. Please consult a competent professional for expert financial or other assistance or legal advice.