Fundamental analysis is a diverse subject with many different types of analysis coming together to form this type of stock market analysis , analyzing the P/E ratios or balance sheet or cash flow analysis is fine but one not forget that it’s the promoters or management that run the company any decision by them directly affects the share price , we have seen the collapse of yes bank and Sahara empire due to bad decisions or malafide by the promoters of the company , ICICI is another example where Chanda Kochar the CEO of the bank had malafide intentions all of this affects the fundamental structure of any company.
Below we will tell how to analyze the promoters or the management of any company based on 3 points , if a company successfully passes in these 3 tests then it can be a prime candidate for investment.
1. There should be no allegations of frauds / scams against the promoters or management –
While doing analysis of the owners of a company you should look for whether there has been any allegation of fraud/scam against the owners of a company or any court cases are going against the promoters regarding some fraud , this affects the whole fundamental structure of the company very seriously , you should stay away from such companies for investment purpose , if a promoter or management are not honest that is a sign that you must not invest even 1 Rs in the company.
You can do this analysis simply by searching on google with the name of company affixed with “ scam “,” fraud “,” allegation “,” court case ” , you can also search individual name of promoter affixed with above terms to refine the search, for example – “ UPL fraud ” , “ Subarat Roy fraud ” , “ Chanda kochar fraud ” etc.
2. Promoters should have good past experience –
Another very important thing to look while analyzing the promoters is their past experience , if a 20 year old has become a promoter then you must of course remain a bit skeptical , although youngsters have proven experts wrong from time to time but experience does matter , if a promoter is experienced and has handled other companies that have fared well then that is obviously a good sign , if the previous ventures of the promoter have failed then you should be skeptical of the current company floated by the same promoter , hence this experience based background check is necessary and should be a part of your fundamental research , you can easily do so by going to the wikipedia or linkedIn page of the promoter there you can get details of all past ventures of a promoter.
Experienced is also necessary because if anything goes against the company like many companies have struggled in this COVID-19 then experience helps a lot in keeping the company afloat.
3. Promoter shouldn’t be selling his own stake in the company –
Another important thing to notice while doing the analysis of the promoters is to look for whether the promoters are retaining or increasing their share in the company if a promoter increases or at least retains his share then that reflects the confidence of the promoter in his own company , on the other hand if a promoter is selling his own stake in the company then that reflects that the promoter doesn’t has confidence in his own company , if a owner of a company has no confidence in his own company then why should we have confidence in his company and invest in it ?
One thing to look for here is that promoter shouldn’t be selling his shares due to some ruling of a regulator , for example RBI ordered Mr. Uday Kotak to reduce his promoter stake in Kotak bank , such reduction doesn’t reflect that kotak bank is not good or Uday kotak doesn’t has confidence in his company , so you will have to look at promoter ownership in the right context , information regarding promoter stake can be found on Moneycontrol.com .
Summary –
Above we have discussed 3 basic steps to analyze the promoters , these can be used to make a basic view about the promoter of any company , the promoters shouldn’t be involved in a fraud , they must have past experience and finally they must have confidence in their own company. Although there are several other points which you must analyze but we can’t discuss all in the same article we will be discussing more advanced parameters to test the promoters in future articles , so stay tuned , if you want to get regular updates please subscribe to our telegram channel , if you loved the article please rate it below and comment if you have any doubts or questions.