How do you define what a company is? That should seem like an easy question, and while I doubt youâre still scratching your head, hereâs a dictionary definition, anyway: âa business organization that makes, buys, or sells goods or provides services in exchange for moneyâ.
That may serve for the layman. But as an investor, you need to have a much deeper understanding. A company has fixed assets, such as property, for instance.
The out-of-favour grocer Morrisons (LSE: MRW) has a freehold property portfolio worth around ÂŁ9bn. When you consider that Morrisons has a market cap of ÂŁ4.65bn, that seems staggering.
Shares in Morrisons have fallen by almost a quarter in 2014. The activist investor Elliot Associates, which has built a stake in Morrisons during a torrid period for the Yorkshire-based supermarket grocer, would like to see all that freehold property transferred into a separate business.
Morrisons’ somewhat less radical approach has been to announce ÂŁ1bn of property disposals over the next three years. Of course, this alone wonât transform the company. Strategy is incredibly important — and nor is strategy extraneous to our working definition of a company here.
When rating a company an investor needs to scrutinise its management team. Think to the former Tesco (LSE: TSCO) boss, Terry Leahy. Under Leahy, Tesco grew to 31.8% of the UK grocery market.
Tescoâs market share presently stands at 28.7% and shareholders have long suffered on account of Leahyâs over-ambition. (Always, always be wary of over-ambition.)
Here at the Motley Fool we advocate buying quality companies, and subsequently holding them over a period of around five years. Tesco shares have fallen in price by 60p, or 16.5%, over the last five years.
But remember you brokerâs disclaimer: âPast performance is not an indicator of future returns.â This refers — if implicitly — to outperformance. But the reverse is true, as well.
Just because a companyâs share price has lagged the wider market for an extended period, it doesnât mean that the shares wonât make healthy gains in future years.
BP (LSE: BP) is another example of a blue-chip laggard. The oil majorâs chief executive, Bob Dudley, has spoken of creating âa US-style energy boom in the UKâ. To do this necessitates attracting high-calibre young workers.
A company, as weâve seen, is the sum of many parts. The people — workers, from management down — are integral to its success. In a new survey from Glassdoor, BP was ranked as the ninth best UK company on compensation and benefits. Remember, then, before you next rate a prospective investment, that people are as important — possibly more important — to a firm than its fixed assets.
