At the Fool, we believe that in order to find good shares to invest in, one has to start 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…
At the Fool, we believe that in order to find good shares to invest in, one has to start 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 Singtel
With that, let’s run Singapore Telecommunications Limited (SGX: CC3) – or more popularly known as Singtel – through the framework today.
For some background, Singtel is one of the big trio in the Singapore telecommunications industry with the other two being Starhub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F). You can read more about the company here.
Here’s a quick rundown of Singtel for the Rule Maker framework (numbered accordingly following the seven criteria above):
- As a telecommunications service provider, Singtel provides services that are used every day by consumers. In Singapore, where there is an estimated 150% penetration rate in mobile, it can be argued that the services provided by the company are affordable enough to reach most customers here. The same may apply in Australia and other parts of Asia where Singtel operates.
- As a service provider, we can use operating margins in place of gross margins for Singtel. Operating margins for Singtel for the first nine months of the financial year ending 31 March 2015 (FY2015) stood at 17.3%, which is in positive territory. As a comparison, Singtel’s smaller rival Starhub spotted a 19.6% operating margin in 2014.
- Moving on, Singtel’s net margins in the first nine months of FY2015 stood at a healthy 22%, much higher than its operating margin. During that nine month timeframe, Singtel was able to derive $1.27 billion in income from its associates and joint-ventures.
- When it comes to top-line growth, Singtel has been rather lackluster. The telco’s total revenue for FY2014 is only 12.8% higher than in FY2009; this translates into an annualised growth rate of only 2.4%.
- As of the end of 2014, Singtel had $629.3 million in cash and equivalents, and a hefty $8.74 billion in borrowings. This gives a cash to debt ratio of 0.07, which is significantly below Tom’s requirement of 1.5. This is where Foolish investors may want to keep an eye on.
- As of the end of 2014, Singtel had $629.3 million in cash, $4.7 billion in current assets, and $6 billion in current liabilities. This gave a positive Foolish Flow ratio of 0.68, meaning that Singtel is able to hang onto most of the cash which flows through its coffers.
- It is hard to judge the level of interest for each individual, but the services that Singtel provides would arguably be familiar and easy enough 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 Singtel, the bad is that it has not been growing its topline much. The firm also has a high debt load that is increasing and that’s something to keep an eye on, though borrowings may come with the territory for telcos.
As for the good, we can see that Singtel has a stable revenue base and the ability to generate consistent cash flow. In addition, the telco has a good net margin (which could be important since it is not growing its top-line much at the moment and has a high level of borrowings) and also appears to excel at holding onto much of the stable gush of cashflow flowing through it.
As a final note, it is important understand that no single company is perfect.
With the characteristics defined above, the onus remains with the Foolish investor to decide if Singtel’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.