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 Singapore Post
With that, let’s run Singapore Post Limited (SGX: S08) through the framework today.
As a quick introduction, the ever-present Singapore Post is primarily in the business of providing mail and logistics services. Most Singaporeans should be familiar with the company’s namesake mail service. You can read more about the company here.
So, here’s how Singapore Post has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- The mail and logistics services that Singapore Post provides are used by consumers on a regular basis. Its services can also be considered to be affordable.
- As a service provider, we can use the operating margin as a proxy to the gross margin. For the first nine months of the financial year ended 31 March 2015 (FY2015), Singapore Post reported an operating margin of 21.8%.
- For the net margin figure, Singapore Post clocked in a handsome 17.3% for the same period.
- Singapore Post’s topline growth has been encouraging as well. The firm’s revenue has expanded by almost 80% from S$514.5 million in FY2009 to S$910.8 million over the last 12 months.
- As of the end of 2014, Singapore Post had $534.1 million in cash and equivalents, and $235.5 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, Singapore Post had $534.1 million in cash, $737.7 million in current assets, and $341 million in current liabilities. This gave a healthy Foolish Flow ratio of 0.59 (generally, a ratio of less than 1 is considered good). This may indicate that Singapore Post has been able to hold on the cash that flows through its coffers. Part of the reason for the low Foolish Flow ratio is the proportionally higher account payables that Singapore Post has been able to maintain.
- The interest level will differ by individual for Singapore Post, but it is possible that most investors would find the company’s business of delivering mail and providing logistics services 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 Singapore Post, we might see a company that has been able to grow its revenue base at an encouraging rate while bringing in good net margins. Singapore Post’s cash to debt ratio is also passable by Tom’s standards and the company has also been adept in hanging on to the cash that flows through its coffers. These strengths may prove to be critical for it to fund its future growth.
On a separate note, my colleague Stanley Lim noted that Singapore Post has not been able to grow its profits at the same rate as its revenue. This trend certainly bears watching as the company navigates through the potential disruption of its mail business.
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 Singapore Post’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.