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
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 SIA Engineering
With that, let’s run SIA Engineering Company Limited (SGX: S59) through the framework today.
SIA Engineering is a leading player in the aircraft maintenance, repair, and overhaul (MRO) sector. Its engineering services can be divided into the line maintenance segment and the repair and overhaul segment.
You can read more about the company here.
So, here’s a quick take on how SIA Engineering has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- The line maintenance business segment of SIA Engineering offers services which are routine in nature. Meanwhile, the repair and overhaul segment includes scheduled maintenance services. Affordability is harder to judge, but SIA Engineering’s services can be considered essential to the airlines that pass through Changi Airport.
- As an engineering service provider, we can use SIA Engineering’s operating margin as a proxy to the gross margin. For the first nine months of FY2014/2015 (financial year ended 31 March 2015), SIA Engineering reported a meager operating margin of 7.2%.
- For the net margin figure, SIA Engineering clocked in a healthy 17.1% for the same period as above. In this case, SIA Engineering’s net income had benefited from the share of profits of its associates and joint venture companies.
- SIA Engineering’s top-line has been rather flat over the past few years; for the 12 months ended 31 December 2014, the firm’s revenue was S$1.156 billion, up a mere 11% from S$1.045 billion seen in FY2008/2009.
- As of the end of 2014, SIA Engineering had $364.9 million in cash and equivalents, and $29.5 million in borrowings. This gives a cash to debt ratio of more than 12, which is well above Tom’s desired figure of at least 1.5.
- As of the end of 2014, SIA Engineering had $364.9 million in cash, $691.5 million in current assets, and $240.1 million in current liabilities. This gave a Foolish Flow ratio of 1.36 (generally, a healthy figure here would be less than 1). While SIA Engineering has been able to hold a proportionally lower amount in account receivables as compared to its account payables, the firm had maintained a sizeable amount of inventory (S$117.6 million in this instance) and work in progress.
- The interest level will differ by individual for SIA Engineering, but it is possible that investors may need deeper technical knowledge in order to fully appreciate the company’s competitive advantages.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With SIA Engineering, we might see a stalwart company that’s able to maintain a stable revenue base while bringing in respectable net margins. While SIA Engineering did not quite met Tom’s requirement for the Foolish Flow ratio, it does exhibit a stellar cash to debt ratio. The strength of its balance sheet may prove to be critical 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 SIA Engineering’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.