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 ComfortDelgro
With that, let’s run ComfortDelgro Corporation Limited (SGX: C52) through the framework today.
ComfortDelgro is in the business of providing land transport and related services. In fact, some of its transport operations are pretty well-known here; most Singaporeans should be familiar with the company’s namesake taxi services. Meanwhile, the company also has bus operations and rail operations as well as a majority ownership in VICOM Limited (SGX: V01).
You can read more about ComfortDelGro in here.
So, here’s how the firm has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- The transport services that ComfortDelgro provides are used by the general public on a daily basis. Its services can also be considered to be affordable.
- As a service provider, we can use operating margin as a proxy to the gross margin. In 2014, ComfortDelgro reported an operating margin of 10.9%.
- For the net margin figure, ComfortDelgro clocked in a respectable 8.5% for the same year.
- ComfortDelgro’s top-line growth has been fairly steady as well, with its revenue expanding at an annual rate of 5.8% since 2009.
- As of the end of 2014, ComfortDelgro had $825.8 million in cash and equivalents, and $737.1 million in borrowings. This gives a cash to debt ratio of 1.1, which is below Tom’s desired figure of at least 1.5.
- As of the end of 2014, ComfortDelgro had $825.8 million in cash, $1.24 billion in current assets, and $1.26 billion in current liabilities. This gave a healthy Foolish Flow ratio of 0.33 (generally speaking, anything below 1 would be ideal). This may indicate that ComfortDelgro can hold on the cash that flows through its coffers. Part of the reason for the low Foolish Flow ratio is the high account payables that ComfortDelgro has been able to maintain.
- The interest level will differ by individual for ComfortDelgro, but it is possible that most investors would find its business 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 ComfortDelgro, we might see a stalwart company that has been able to grow its revenue base at a fair rate while bringing in respectable net margins. Furthermore, it has been adept in hanging on to the cash that flows through its coffers
Although the company’s cash to debt ratio did not meet Tom’s standards, its cash position does exceed its debt position; this balance sheet strength may prove to be critical for ComfortDelGro in funding its future 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 ComfortDelgro’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.