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47 Things to Check Before You Buy a Stock: Part 10

Red Ticks in Checklist
Red Ticks in Checklist

We continue with the second section on the day-to-day operations of the business and how well management is equipped to deal with it.

This is the second part on management and how they handle the daily operations of the business.

For parts one through nine of this insightful series, please click on the links below.

Part 1 – please click HERE.

Part 2 – please click HERE.

Part 3 – please click HERE.

Part 4 – please click HERE.

Part 5 – please click HERE.

Part 6 – please click HERE.

Part 7 – please click HERE.

Part 8 – please click HERE.

Part 9 – please click HERE.

44. Does the management team know how to hire well?

Investors should assess if management is hiring the right staff by observing the staff turnover of both middle managers as well as rank and file staff.

A big red flag would be raised if middle managers constantly leave the organisation, and are replaced by hires who have neither the aptitude nor the experience to handle their (new) roles.

Management should take their time to hire the right people for the job, rather than simply hiring the best person which happens to come along and rushing through the recruitment process.

Wrong hiring decisions are costly for businesses as time and resources have to be spent training the staff, who subsequently leaves.

45. Does the management team focus on cutting unnecessary costs?

Frugal managers are a boon for any business, but investors also need to ensure that they are not frugal to the point where they hesitate to spend money on growing the business.

The key here is to eliminate unnecessary costs, rather than cutting back on all types of spending.

Investors should also observe the type of costs that are being cut.

Businesses which cut customer-related costs may end up suffering from customer attrition.

Instead, the focus could be on eliminating costs in the supply chain to make it more efficient.

46. Are the CEO and CFO disciplined in making capital-allocation decisions?

Investors should note that managers who are adept at managing daily operations are usually not good with capital deployment decisions, as these require two different skill sets.

Hence, managers removed from making day-to-day decisions will have a better top-down view of the business and be able to allocate capital more effectively.

The best way to determine if managers allocate capital well is to observe the historical allocation decisions they made.

This could be in various areas such as the buying back of shares or in making new acquisitions.

47. Do the CEO and CFO buy back stock opportunistically?

Stock repurchases have the effect of reducing the outstanding number of issued shares, thereby raising the earnings per share, assuming earnings stay constant.

If the stock is undervalued, the act of buying back shares may materially raise the value of the business.

If the management has a good idea of the value of the business, it will be able to commit to a program to buy back stock at opportunistic times.

By doing so, shareholders should see the value of the company increase as the pool of issued shares shrinks.

This could be the fastest way to jump from a “newbie” investor to a seasoned pro. Our beginner’s guide shows everything you need to know to buy your first stock and beyond. Click here to download it for free today.

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Disclaimer: Royston Yang does not own any of the companies mentioned.

The post 47 Things to Check Before You Buy a Stock: Part 10 appeared first on The Smart Investor.