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 First Resources
With that, let’s run First Resources Ltd (SGX: EB5) through the framework today.
As a palm oil producer, First Resources’ business is organized into three major segments: Crude Palm Oil; Palm Kernel; and Refinery and Processing.
To learn more about the company, go here.
So, here’s how First Resources has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- First Resources sells its palm-based end products to third parties. These products, which include biodiesel, palm kernel oil, and so on, can be considered to be staples that are used frequently.
- For 2014, First Resources reported a handsome gross margin of 52.5%.
- For the net margin figure, First Resources clocked in a stellar 29.4% for the same year.
- First Resources’ topline growth has been stunning in recent years as well; revenue has expanded at an annual rate of 20.6% between 2009 and 2014.
- As of the end of 2014, First Resources had $350.9 million in cash and equivalents and $583.1 million in borrowings. This gives a cash to debt ratio of 0.6, which is below Tom’s desired figure of at least 1.5.
- As of the end of 2014, First Resources had $350.9 million in cash, $474.9 million in current assets, and $88.3 million in current liabilities. This gave a Foolish Flow ratio of 1.4 (generally, anything below 1 would be ideal). Part of the reason for the high Foolish Flow ratio is the relatively high amount of inventory that First Resources has to maintain.
- The interest level for First Resources will differ by individual, but it is possible that most investors may be less familiar with the intricacies of the oil palm business.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With First Resources, we might see a fast-growing company with stellar gross margins and net margins. That said, both the firm’s cash to debt ratio and Foolish Flow ratio were below Tom’s desired standards – these are worth keeping an eye on as the company expands.
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 First Resources’ 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.