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 Boustead Singapore
With that, let’s run Boustead Singapore Limited (SGX: F9D) through the framework today.
For some background, Boustead Singapore is a technology group that’s focused on geo-spatial solutions and infrastructure-related engineering.
Within that general classification, there are three major divisions: Energy-Related Engineering; Geo-Spatial Technology; and Real Estate Solutions. Boustead Singapore’s currently in the midst of spinning-off the last division into a stand-alone listed company.
You can read more about Boustead Singapore here.
So, here’s how the company has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a player in the energy and property sector, Boustead Singapore is mainly involved in large scale projects. It is unlikely that its customers will be ordering new services on a daily basis and this runs counter to Tom’s preference.
- The gross margin for Boustead Singapore in the first nine months of the financial year ended 31 March 2015 (FY2015) comes in at 30.9%.
- Meanwhile, Boustead Singapore clocked in a healthy net margin of 11% for the first nine months of FY2015.
- When it comes to top-line growth, Boustead Singapore has been lackluster with its revenue for the last 12 months coming in just 11.4% higher than in FY2009. That said, sales growth was healthy in the first nine months of FY2015, coming in at 17%.
- As of the end of 2014, Boustead Singapore had $291.9 million in cash and equivalents, and $159.6 million in borrowings. This gives a decent cash to debt ratio of 1.8, which is above Tom’s desired figure of at least 1.5.
- As of the end of 2014, Boustead Singapore had $291.9 million in cash, $568.5 million in current assets, and $316.9 million in current liabilities. This gave a good Foolish Flow ratio of 0.87, meaning that Boustead Singapore is able to hang on to the cash which flows through its coffers. Part of the reason is because Boustead Singapore is able to maintain a larger payables amount on its balance sheet compared to its receivables.
- For familiarity and interest, it may be harder for the common investor to possess the technical know-how to fully appreciate the scale and competitive advantages of Boustead Singapore.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Boustead Singapore, we might see a company with a stable revenue base and good net margins. Boustead Singapore also excels at hanging on to the cash which flows through it, and this is supplemented by its encouraging cash to debt ratio. These factors may prove to be important for Boustead Singapore, since it has not been growing its top-line at a high rate in recent years.
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 Boustead Singapore’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.