At the Fool, we believe that finding good shares to invest in first starts with figuring out how strong a company’s business is. And to do so, we can turn to the Rule Maker framework outlined by Motley Fool Chief Executive Officer Tom Gardner in his book Rule Breakers, Rule Makers. The Rule-Maker Framework Here’s how the framework looks like: Is the company selling low priced, everyday items? How does the business’s gross margins look like? What about its net margins? Is the company’s sales growing? What about its cash to debt ratio? Is its…
At the Fool, we believe that finding good shares to invest in first starts with figuring out how strong a company’s business is.
And to do so, we can turn to the Rule Maker framework outlined by Motley Fool Chief Executive Officer Tom Gardner in his book Rule Breakers, Rule Makers.
The Rule-Maker Framework
Here’s how the framework looks like:
- Is the company selling low priced, everyday items?
- How does the business’s gross margins look like?
- What about its net margins?
- Is the company’s sales growing?
- What about its cash to debt ratio?
- Is its Foolish Flow Ratio (a gauge of how fast the business can bring in cash) strong?
- Lastly, what’s your level of familiarity and interest with the business?
Figuring out Starhub
With that, let’s run StarHub Ltd (SGX: CC3) through the framework today.
For some background, StarHub is one of the big trio in Singapore’s telecommunications industry with the other two being Singapore Telecommunications Limited (SGX: Z74) and M1 Ltd (SGX: B2F). You can read more about Starhub in here.
So, here’s how Starhub fares against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a mobile service and pay TV provider, the company’s services are used every day by consumers. With a 150% penetration rate in mobile in Singapore, it can be argued that Starhub’s services are affordable enough to reach most consumers within our country.
- As a service provider, we can use operating margins in place of gross margins for Starhub. Operating margins for the company in 2014 stood at 19.6% which isn’t too bad. As a comparison, Starhub’s bigger rival Singtel had managed to achieve a
27.5%15.6% operating margin in its recent quarter.
- On a positive note, Starhub’s net margin in 2014 stood at a healthy 15.2%.
- When it comes to top-line growth though, Starhub has been rather lackluster – the telco’s revenue is inching up by only 2.5% per year on average over the past five years.
- As of end-2014, Starhub had $264.2 million in cash and equivalents and $687.5 million in borrowings. This gives the telco a cash to debt ratio of 0.38, which is well below Tom’s desired ratio of 1.5.
- As of the end of 2014, Starhub had $264.2 million in cash, $667.1 million in current assets, and $964 million in current liabilities. This gives a good Foolish Flow ratio of 0.42, meaning to say that Starhub is able to hang onto most of the cash which flows through its coffers. Part of the reason is Starhub’s proportionally larger payables (money it owes) compared to its receivables (money the customer has yet to pay).
- It is hard to judge the level of interest for each individual, but the services that Starhub provides would arguably be familiar and easy to understand and follow for most investors.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Starhub, we might see a company with a stable revenue base. It’s also a stable cash flow generator with a good net margin which could be important since it is not growing its topline much at the moment. Debt may come with the territory for telecommunication companies, but Starhub does appear to excel at holding on to much of the stable gush of cashflow coming in.
As a final note, it is important understand that no one company is perfect.
With the characteristics defined above, the onus remains with the Foolish investor to decide if Starhub’s current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.