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 M1
With that, let’s run M1 Ltd (SGX: B2F) through the framework today.
For some background, M1 is one of the big trio in the Singapore telecommunications industry with the other two being Starhub Ltd (SGX: CC3) and Singapore Telecommunications Limited (SGX: CC3). You can read more about M1 in here.
So, here’s how the telco fares against the Rule Maker framework (numbered accordingly following the seven criteria above):
- As primarily a mobile service provider and broadband provider, M1 provides services that are used every day by its customers. With a 150% penetration rate for mobile in Singapore, it can be argued that the services M1 provides are affordable enough to reach most customers here.
- As a service provider, we can use operating margins in place of gross margins for M1. Operating margins for M1 for 2014 stood at 20.4% which is in positive territory. As a comparison, M1’s rival Starhub sported a 19.6% operating margin in 2014.
- Meanwhile, M1’s net margin in 2014 stood at a healthy 16.3%.
- When it comes to top-line growth, this is where M1 has been a little anaemic; since 2009, sales at the company have grown at an annual rate of just 6.5%. It must be noted though, that this level of sales growth is still relatively faster than its peers Starhub and Singtel.
- As of the end of 2014, M1 had $22.8 million in cash and equivalents, and a hefty $302 million in borrowings. This gives a cash to debt ratio of 0.08, which is significantly below Tom’s requirement of at least 1.5.
- As of the end of 2014, M1 had $22.8 million in cash, $225.9 million in current assets, and $274.5 million in current liabilities. This gave a positive Foolish Flow ratio of 0.74, meaning that M1 is able to hang on to the cash which flows through its coffers.
- It is hard to judge the level of interest for each individual, but the services that M1 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 M1, we might see a company that is growing its top-line relatively faster than its peers, albeit from a lower revenue base. It’s also a stable cash flow generator with a good net margin. As another plus point, M1 does appear to excel at holding on to much of the stable gush of cash flow coming in.
As for the bad, although debt may come with the territory for telecommunication companies, the low cash to debt ratio that M1 possess means that we may still want to keep a watchful eye on the company’s debt levels.
As a final note, it is important to understand that no one company is perfect.
With the characteristics defined above, the onus remains with the Foolish investor to decide if M1’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.