Taming the Money Sharks by Philip Shu-Ying Cheng

Author:Philip Shu-Ying Cheng
Language: eng
Format: epub
Publisher: Wiley
Published: 2013-05-21T16:00:00+00:00

D. Don’t Be Blind to a Company’s Personality

Try to invest employing your own strategies. Most readers are familiar with evaluations of companies based on financial information. However, the nonfinancial information can be just as important in evaluating the company for your investment. In other words, knowing the company’s culture should also be helpful in your evaluation.

As you might suppose, there are probably 101 ways to study the company’s culture. One of the easiest ways to start is by observing the CEO’s personality. In addition, observe changes of CEO within a company; CEOs come and go. During these changes, company cultures may or may not change. This may also be influenced by the company’s board of directors, key executives, or other cultural factors engrained in the company.

When reading financial reports, let me remind you to learn to decipher the “soft speak” in any sentences in financial reports. Let us take a glove manufacturing company to make a point. To highly simplify the products, let us say that the company makes only two types of gloves—cloth and leather.

In a shareholder report, the CEO announces that the company will change to a “superior product strategy” (concentration on cloth glove production only). The decision was based on the much larger market for cloth gloves; thus sales are expected to increase. In addition, production worker resources and inventory management can now be significantly simplified, thus increasing overall efficiency.

On the surface, this is a positive announcement. However, the CEO did not volunteer other facts: the company was experiencing difficulty in selling leather gloves, and thus there was no point in continuing to manufacture them.

From a financial standpoint, the CEO also failed to mention that the gross profit margin of cloth gloves was only 10%, compared with 40% for leather gloves. Unless the future cloth glove sales can increase dramatically, the total gross profit will suffer, directly affecting net profit and stock prices.

Once you have identified any “soft-speak” language or oversimplified statements, it may be a signal for you to go slow and make your judgment accordingly.

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