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 Riverstone Holdings
With that, let’s run Riverstone Holdings Limited (SGX: AP4) through the framework today.
For some background, Riverstone Holdings is primarily a manufacturer of disposable nitrile gloves for the clean room and healthcare industry.
Here’s how Riverstone Holdings has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- Disposable gloves can be sold by the millions, and are likely to be considered a low expense item by Riverstone Holdings’ customers. The disposable nature of gloves would also require the company’s customers to replenish frequently as well.
- The gross margin for Riverstone Holdings in 2014 came in at 27.2%.
- For 2014’s net margin, Riverstone Holdings clocked in a healthy 17.8% .
- Riverstone Holdings has delivered a healthy 20% annual increase in revenue since 2009.
- As of the end of 2014, Riverstone Holdings had RM 79.4 million in cash and equivalents, and no debt. This gives a cash to debt ratio which is well ahead of Tom’s desired ratio of at least 1.5.
- As of the end of 2014, Riverstone Holdings had RM 79.4 million in cash, RM 210.1 million in current assets, and RM 59.1 million in current liabilities. This gave a less desirable Foolish Flow ratio of 2.2. The reason for the higher ratio is down to the higher account payables relative to the firm’s account receivables, as well as the level of inventory it has to maintain.
- It is hard to judge the level of interest for each individual but for familiarity, there is a fair chance for the Foolish investor to understand Riverstone Holdings’ products.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Riverstone Holdings, we might see a company with a growing revenue base and solid net margins. The company’s position on the supply chain may require it to hold higher levels of inventory, but the company is supported by a strong cash position and no debt. These factors may prove to be important for Riverstone Holdings as it searches for its next leg of growth.
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 Riverstone Holdings’ 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.