The fact that there is no readily available formula that gives one faux mathematical precision should not dissuade an investor from trying to evaluate the people running the show. A company's ability to attract and retain qualified management is a critical determinant of its ability to sustain growth over prolonged periods of time. Although past performance is a lukewarm indicator of future performance for mutual funds, sustained corporate growth over prolonged periods of time is an excellent indication of management's ability to do the job. Creating sustained growth over periods of five years or longer requires more than dumb luck. Although even the most stellar of managements can only minimize the effects of industry-wide downturns, ability shines through when one considers sustained earnings and revenue growth.
Quality management can also reveal itself in the balance sheet.
You will be able to tell this by simply looking at its inventory turns over the past five or ten quarters. Days sales outstanding will seem bloated when you compare the company to similar companies. A bulge in DSOs means that a company has shipped a lot of product without collecting. As accounting rules allow companies to count as revenue product that have been delivered but not paid for, management might be motivated to push product out into the channel in order to make sales targets. Philip Fisher stressed the importance of management throughout the organization in his book Common Stocks and Uncommon Profits .