What to look for in a company while investing?
For decades in India, scams and scandals have always been associated with politicians. Sadly, as of today, that has not changed as politicians continue to siphon vast amount of funds for their personal gain; money which could have so easily been deployed for India's development.
But India has had to witness another disturbing trend in the last few years. Notably that of big Indian companies being implicated in large scale corruption. Satyam is a case in point. The scale and scope of this fraud was so huge that it rocked the entire nation. What also made it so shocking was that the company's auditors were equally at fault. Especially since the outside world has no choice but to accept the 'audited' financial statements at their face value.
But the matter did not end there. In recent times, a spate of scandals has erupted in the telecom space which has indeed tarnished the image of India Inc. While all of these have highlighted the unholy nexus between politicians and businessmen, there have also been instances of Indian companies involved in 'window dressing' accounts in some form or the other. All with the aim of displaying higher profits to investors.
Indeed, finding any fraud in the way companies report their financial statements is practically impossible for any investor. But if a careful study of annual reports every year does throw up some anomalies, investors would do well to be careful before investing money into the stocks of such companies.
Investing in stock markets is not only about how fast companies are growing. Is the quality of growth good? Are profits higher because of the strength of the company's business or because of some accounting manipulation? Does the company's management have a good understanding of the business? Are its business decisions sound? How good are its corporate governance practices? These are some of the questions that investors need to ask themselves.
In a bull run it is very easy to get carried away with all the exuberance surrounding potential growth prospects. But ultimately the strength of a company's business and the soundness of its financial statements do get reflected in the valuations.
Thus, even now, it is better late than never to identify those companies having strong managements with good corporate governance practices at reasonable valuations. This will certainly ensure strong returns in the long term.