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Would Kingsmen Creatives Ltd Be Good Enough To Buy Now?

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:

  1. Is the company selling low priced, everyday items?
  2. How does the business’s gross margins look like?
  3. What about its net margins?
  4. Is the company’s sales growing?
  5. What about its cash to debt ratio?
  6. Is its Foolish Flow Ratio (a gauge of how fast the business can bring in cash) strong?
  7. Lastly, what’s your level of familiarity and interest with the business?

Figuring out Kingsmen Creatives

With that, let’s run Kingsmen Creatives Ltd (SGX: 5MZ) through the framework today. Its business is organized into four major divisions: Exhibitions and Museums; Retail and Corporate Interiors; Research and Design; and Alternative Marketing

To learn more about the company, go here and here.

So, here’s a quick rundown of Kingsmen Creatives against the Rule Maker framework (numbered in the same order as the seven criteria above):

  1. The marketing services that Kingsmen Creatives provides are mainly on a project by project basis. While 70% of its clients do return to it for more business, its revenue is not of the daily recurring variety that Tom covets.
  2. For 2014, Kingsmen Creatives reported a gross margin of 25.2%.
  3. For the net margin figure, Kingsmen Creatives clocked in a tighter 5.3% for the same year.
  4. Kingsmen Creatives’ top-line growth has been fairly steady as well with revenue expanding at an annual rate of 6.8% since 2009.
  5. As of the end of 2014, Kingsmen Creatives had $81.4 million in cash and equivalents, and $6.5 million in borrowings. This gives a cash to debt ratio of more than 12, which is well in excess of Tom’s desired figure of at least 1.5.
  6. As of the end of 2014, Kingsmen Creatives had $81.4 million in cash, $194.6 million in current assets, and $120.5 million in current liabilities. This gave a borderline Foolish Flow ratio of 0.94 (generally, we’re looking for a ratio below 1). Part of the reason for the decent Foolish Flow ratio is the proportionally higher account payables that Kingsmen Creatives has been able to maintain against its account receivables.
  7. The interest level will differ by individual for Kingsmen Creatives, but it is possible that most investors may be less familiar with the intricacies of its business.

Foolish takeaway

Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.

With Kingsmen Creatives, we might see a company that has been growing its revenue base at a steady rate but which can only manage to bring in tight net margins. Meanwhile, both the firm’s cash to debt ratio and Foolish Flow ratio exceed Tom’s standards as well, making it possible for the company to fund its future growth plans.

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 Kingsmen Creatives’ 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.