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…
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 Sarine Technologies
With that, let’s run Sarine Technologies Ltd (SGX: U77) through the framework today.
The business of Sarine Technologies lies in the provision of a wide range of technological tools and solutions to help improve the operational efficiency of companies across the diamond manufacturing supply chain. You can read more about Sarine Technologies here.
So, here’s how the firm has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a manufacturer of various types of systems used in the diamond manufacturing process, the products that Sarine Technologies designs and sells are certainly not of the everyday variety that Tom favors. That said, Sarine Technologoes does have recurring revenue which resembles the “frequently used” nature of low-priced everyday items. However, the recurring portion of the company’s revenue only makes up a little over 35% of its total sales in 2014.
- The gross margin for Sarine Technologies in 2014 came in at 70.5%. It’s notable that while the company sells its systems infrequently, those sales do come with a high gross margin.
- On the net margin side of things, Sarine Technologies also shines with a healthy figure of 31%.
- Sarine Technologies’ top-line has more than quadrupled over the past five years from US$21.4 million in 2009 to US$87.8 million in 2014. This would be a stunning annualised growth rate of 33%.
- At the end of 2014, Sarine Technologies had $45.4 million in cash and equivalents, and no borrowings. With no debt, this gives the company a cash to debt ratio which is well above Tom’s desired ratio of 1.5.
- At the end of 2014, Sarine Technologies had $45.4 million in cash and equivalents, $71.6 million in current assets, and $12.3 million in current liabilities. This gave a less promising Foolish Flow ratio of 2.13. Part of the reason could be because Sarine Technologies has to maintain higher inventory levels as well as possibly provide favorable payment terms for its customers.
- Diamonds may be a woman’s best friend, but the systems and solutions that Sarine Technologies provides to produce the shiny gems may require specialized knowledge to have full understanding of their advantages.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Sarine Technologies, the bad is that the nature of its products naturally results in less frequent sales. It may also have to extend favorable payment terms to its customers, leading to a longer cash conversion cycle.
The good news is that the firm has experienced explosive revenue growth; it has high gross and net margins; and it has a strong balance sheet to weather any expected downturns due to the nature of its business.
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 Sarine Technologies’ 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.