| Qualitative Analysis for You |
There are a few crucial qualitative factors, looking at which we can determine with reasonable certainty, whether a business will be successful in the long run or not.
Strong top management: A strong management is the backbone of any successful company. It is the management that makes the strategic decisions and unless the business has innovative and dedicated people guiding the company, it cannot sustain for long. The success of Infosys can be attributed to the integrity, vision and transparency of its top management.
Work force and related policies of the company: Everything about a business begins and ends with people. The longevity, stability and skill of the work force are vital for the success of any business. A Company with many long-term employees has more value than one with heavy turnover. The policies of the company, including employee-training programs, facilities provided both at the work area and outside, determine the productivity and employee turnover rates.
Another important aspect to consider is the union relations with the management. Companies like Bata and Siemens have suffered due to problems with their work force and labor unions.
Industry and the competition: The industry segment in which the company is operating, its potential for future growth and the presence of strong players will influence the performance of the company.
Entry barriers: Barriers to enter the market are extremely important. An example is
the restaurant industry, where anybody can open up a restaurant. Compare this with any
technology intensive or core industry like steel where there are massive barriers to
entry. This can come in the form of large capital expenditure, exclusive distribution
channels, government regulation, patents, etc. The harder it is for competition to enter
an industry the better the advantage to the existing firms.
Clientele and supplier risk: A concentration of the business with any one customer
or a dependency on any one supplier will impact negatively on the business of the company.
As we can see, the present downtrend in the Indian IT sector is due to its near complete
dependence on the US markets.
Market reputation: The reputation of the company in the market place and the length of time it has been established often impact future growth. Although these goodwill factors should already be reflected in earnings, a subjective assessment of these factors should be made in order to understand the company better. Companies like Marico and ITC Ltd. have been around for long and enjoy favorable market opinion.
Brand Name: Brand name is another related competitive advantage that needs to be
considered. For example, the financial value of a brand like Coke is huge. A Company like
HLL relies on a number of popular brands like Surf, Lifebuoy, Rin, Clinic Plus etc. Having
a portfolio of brands diversifies risk, since under-performance of one brand can be
compensated by the performance of other brands. As such, the shareholder/stock market
value is less dependent on a single brand.
Assessing a company from the above qualitative angles and determining whether you should invest in it is as important as looking at the sales and earnings. Apart from these broad parameters there will be other factors specific to every industry which need to be considered. This strategy requires subjective evaluation and may not be one of the easiest to use, but it is one of the most effective ways to evaluate a potential investment.
A Srilakshmi
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