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 BreadTalk Group
With that, let’s run BreadTalk Group Limited (SGX: 5DA) through the framework today.
The company may best known for its pork floss buns that it sells in its namesake bakeries all around the island and other parts of Asia. Beyond the bakery segment, BreadTalk also organizes itself into the restaurant and food atrium segments.
To learn more about the company, go here.
So, here’s how BreadTalk has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a food retailer, BreadTalk provides breads, pastries and tasty meals to thousands of consumers through its outlets like BreadTalk, Toastbox, and Din Tai Fung. From a good plate of fried rice to tasty buns, the items sold are often affordable and within reach of the general consumer.
- For 2014, BreadTalk reported a handsome gross margin of 52.7%.
- The net margin picture was less rosy though – BreadTalk clocked in a meager 2.7% for 2014.
- Meanwhile, BreadTalk’s top-line growth has been exemplary – revenue has been expanding at a stunning annual rate of 19.1% since 2009.
- As of the end of 2014, BreadTalk had $95.5 million in cash and equivalents, and $198.5 million in borrowings. This gives a cash to debt ratio of 0.48, which is well below of Tom’s desired figure of at least 1.5.
- As of the end of 2014, BreadTalk had $95.5 million in cash, $168.7 million in current assets, and $263 million in current liabilities. This gave a healthy Foolish Flow ratio of 0.28 (anything below 1 is ideal). Part of the reason for the low Foolish Flow ratio is the proportionally higher account payables that BreadTalk has been able to maintain against its account receivables. BreadTalk has also kept its inventory levels relatively low.
- The interest level may differ by individual for BreadTalk, but it is likely that the company’s bakeries and food atriums would be familiar and easy to follow for most investors.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With BreadTalk, we might see a fast growing company with tight net margins. Its Foolish Flow ratio tops Tom’s standards but this has not translated to a good cash to debt ratio. The low margins and high levels of debt may be a sign that BreadTalk’s spending heavily to expand; Foolish investors may therefore want to watch BreadTalk’s return on investment carefully along with the changes in its debt levels.
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 BreadTalk’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.