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…
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 Super Group
With that, let’s run Super Group Ltd (SGX: S10) through the framework today.
For some background, Super Group is a leading instant food and beverage brand owner and manufacturer with operations primarily in Asia. You can read more about Super Group here.
Here’s how Super Group fares against the Rule Maker framework (numbered in the same order as the seven criteria above):
- To avid coffee drinkers, it should be no surprise that Super Group provides an everyday beverage enjoyed by a multitude of consumers. The company’s products like instant coffee and tea are often relatively low-priced and within reach of the general consumer.
- The gross margin for Super Group in 2014 came in at 35.1%.
- For 2014’s net margin, Super Group clocked in a healthy figure of 13.3%.
- Super Group’s top-line has grown by 12.8% annually over the past five years. Unfortunately, sales decreased in 2014, down 3% compared to 2013.
- As of the end of 2014, Super Group had $101.3 million in cash and equivalents, and $20.3 million in borrowings. This gives a cash to debt ratio of almost 5, which is well above Tom’s desired ratio of 1.5.
- As of the end of 2014, Super Group had $101.3 million in cash and equivalents, $343.9 million in current assets, and $107.3 million in current liabilities. This gives a less desirable Foolish Flow ratio of 2.26. Part of the reason is because Super Group does not collect its revenue directly from consumers, but rather from distributors. The company also maintains a fairly high inventory level.
- It is hard to judge the level of interest for each individual, but with everyday items like instant coffee and non-dairy creamers, it would be fair to say that Super Group’s products would be familiar and easy to follow for most investors.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Super Group, we might see a company with a fast growing revenue base. The nature of everyday items sold may also provide stable cash flow, and for the case of Super Group, good net margins as well. Super Group has to rely on distributors to get its product out, and because of that, it may have to maintain higher working capital and inventory levels. Thankfully, it has a strong cash to debt ratio.
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 Super Group’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 owns shares in Super Group.