6. What does a company do to maintain or increase its profit margins?
Past margins can be used as a guide, but they are not nearly as important as future margins. Costs tend to rise, so a company must strive to reduce costs by continuously improving its cost efficiency. A quality company must be the most cost-efficient company in its industry or close to it. It must also show evidence that it will remain so.
This gives it room to maneuver, since most competitors cannot compete on price for long in difficult times. Low costs also help it win the market when less cost-efficient companies are forced to abandon competing businesses. In addition, a higher-than-average margin helps finance most of the company's future growth internally. This reduces the company's need to draw on its owners' money to finance growth.
A company must strive to improve its operations by improving its products and services to be more cost-effective. An investor needs to understand how well a company is reducing its costs by improving its operating methods. It is likely that the companies that ared most ingenious in improving their cost efficiency will be the most successful investment targets in the long run. According to Fisher, business leaders talk about cost efficiency more enthusiastically than many other things to investors.
Improving cost efficiency is not the only way to improve margins. Companies can raise prices. Few companies can do this without increasing competitors. Prices can rise as demand increases. A company's margins can also rise when competitors raise their prices more, which promotes sales as customers switch vendors. These ways of increasing margins are rarely long-term. For a long-term investor, continuous price increases to increase margins for all players in a business sector offer a poor prognosis. Monopolies and other closely regulated businesses can be considered exceptions. Fisher also did not understand the concept of a sustainable competitive advantage that would arise, for example, from through psychological factors.
7. Does the company have great relationships with its employees?
One thing investors often neglect is to examine how good the work environment is in the company. A great atmosphere among employees leads to better profit margins. The difference in productivity between a great atmosphere and an average atmosphere is much greater than the direct effect of strikes. Effective management that makes employees feel well-treated improves productivity. Training new employees is expensive, so high staff turnover leads to unnecessary costs.
When management can convince all employees that it is serving their interests, it will be rewarded with lower costs and higher productivity. Management must treat its employees with respect and consideration and communicate well with them. Top management must know how employees at every level think. Management must deal with grievances quickly with employees. Whistleblowers cannot be punished, but must be rewarded. Employees should not just be told to do their jobs, but let them decide how to do their jobs. A high number of strikes indicates difficulties in the work environment. Their absence does not directly mean a great work environment.
In addition, a company should pay wages according to merit. A company that pays its employees better than average and has a better than average profit margin probably has a good work environment. Management should be prepared to improve employees' wages as productivity increases, even at lower levels, and not collect glory and euros only for itself. A company management that takes an unreasonable share of the profits rarely guarantees the best possible returns for investors in the long term.
8. Is the work environment among the company's management great?
The relationships among the top management also affect the company's success. They have the greatest responsibility and their decisions have the greatest impact. In companies that offer the best opportunities for investors, the relationships among the top management are great. Everyone in the top management trusts the CEO and the chairman of the board. This means, among other things, that all employees can rely on their own merits to reach the top management level. Relatives and friends are not favored in the career path. Top managers constantly review salaries according to qualifications and there is no need to ask for raises separately. Top management does not allow solo work but emphasizes working together. It also behaves that way. Investors can find information about these issues by asking employees at different levels of the hierarchy.
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