At the Fool, we believe that in order to find good shares to invest in, one has to start with figuring out how good a 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 good a 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 Silverlake Axis
With that, let’s run Silverlake Axis Ltd (SGX: 5CP) through the framework today.
For some background, Silverlake Axis is a software solutions provider for primarily the banking and financial services sector.
You can read more about the company in here.
Here’s how Silverlake Axis fares against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a player in the software solutions space, part of Silverlake Axis’ sales comes from the implementation of large scale projects – these are certainly not ordered by the company’s customers on a daily basis. However, the maintenance and enhancement services segment of Silverlake Axis does represent recurring income for the firm.
- The gross margin for Silverlake Axis for the first half of FY2015 (financial year ending 30 June 2015) came in at a handsome 65.6%.
- Meanwhile, Silverlake Axis clocked in a healthy net margin of 54.5% for the first half of FY2015.
- Top-line growth for Silverlake Axis has been stunning as well; the software outfit’s revenue has nearly tripled from RM175.8 million in FY2010 to RM515.2 million over the last 12 months.
- As of the end of 2014, Silverlake Axis had RM 337.5 million in cash and equivalents, and RM 3.2 million in borrowings. This gives a cash to debt ratio of more than 100, which is well ahead of Tom’s desired figure of at least 1.5.
- As of the end of 2014, Silverlake Axis had RM 337.5 million in cash, RM 463.5 million in current assets, and RM 105 million in current liabilities. This gave a borderline Foolish Flow ratio of 1.2. Part of the reason is the higher account payables and contract work in progress in its current assets.
- For familiarity and interest, it may be harder for the common investor to possess the technical knowhow to fully appreciate the scale and competitive advantages that Silverlake Axis may possess.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Silverlake Axis, we might see a company with a growing revenue base and enticing net margins. Silverlake Axis may have to work on hanging on to the cash which flows through it, but the firm is supported by a strong cash to debt ratio. These factors may prove to be important for Silverlake Axis, 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 Silverlake Axis’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.