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 OSIM
With that, let’s run OSIM International Ltd (SGX: O23) through the framework today.
OSIM is a retailer of healthy lifestyle products. Its primary product would be its namesake massage chairs. Beyond that, OSIM also has stakes in luxury tea retailer TWG Tea and the Richlife/GNC franchise, which sells nutritional supplements.
You can read more about the company in here.
So, here’s how OSIM has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- Massage chairs from OSIM are typically not daily purchases, although there may be parts of the company’s business (like TWG tea) which may see more frequent purchases. In general, the affordability of OSIM’s products and the frequency of buys would differ according to the type of product.
- OSIM does not report its gross margin. However, if we use the operating EBITDA (earnings before interest, taxes, depreciation and amortization) as a proxy to the gross margin, we can get an operating margin of 21.9% for 2014.
- For the net margin figure, OSIM clocked in an admirable 14.8% for 2014.
- OSIM’s top-line growth has been fairly good as well with its revenue expanding at an annual rate of 7.7% since 2009.
- As of the end of 2014, OSIM had $427.6 million in cash and equivalents and $185.5 million in borrowings. This gives a cash to debt ratio of 2.3, which is above Tom’s desired figure of at least 1.5.
- As of the end of 2014, OSIM had $427.6 million in cash, $586.9 million in current assets and $156.6 million in current liabilities. This gave a Foolish Flow ratio of 1.02, which is just above the threshold of 1 (generally speaking, a good Foolish Flow ratio would be lower than 1). On one hand, in 2014, OSIM maintained a relatively higher account payables when compared to its account receivables. On the other hand, OSIM also had $71.6 million worth of inventory on its books at end-2014 which accounted for a sizable portion of its current assets.
- The interest level will differ by individual for OSIM, but it is possible that most investors would find its business – of selling massage chairs and luxury teas – fairly straight forward to understand.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With OSIM, we might see a company that’s able to grow its revenue base at a fair rate and bring in good net margins. The business of OSIM, though, may require it to hold larger amounts of inventory on its balance sheet. Meanwhile, its cash to debt ratio is passable by Tom’s standards.
Managing its operations, including new product launches and finding the right product mix for its customers, may prove to be the key factor which determines whether OSIM can continue to grow its top-line. Its positive cash to debt ratio indicates that it has the balance sheet to help support any future strategic activities.
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 OSIM’s current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.
For more (free!) stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Like us on Facebook to follow our latest hot articles.
The Motley Fool's purpose is to help the world invest, better.
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 OSIM.