At the Fool, we believe that finding good shares to invest in first starts 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 finding good shares to invest in first starts 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 Jardine Cycle & Carriage Ltd
With that, let’s run Jardine Cycle & Carriage Ltd (SGX: C07) through the framework today.
Jardine C&C has derives majority of its revenue from its Indonesian subsidiary, PT Astra. In turn, PT Astra has diverse sources of revenue, namely: Automotive; Financial Services; Heavy Equipment and Mining; Agribusiness; Infrastructure, Logistics and Others; and Information Technology. In this sense, Jardine C&C can be considered a conglomerate.
You can read more about the company here.
Here’s a quick rundown of Jardine C&C for the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a conglomerate, Jardine C&C has a variety of revenue sources from car sales to oil plantations. While it is likely that most of the customer purchases are not low cost, the diversity in revenue sources may provide the repeatability of purchases that Tom looks for.
- In the case of Jardine C&C, we can use the operating margin as a proxy for the gross margin. In 2014, the operating margin for Jardine C&C came in at 9.5%.
- For the net margin, Jardine C&C clocked in 10% for 2014. Its net margin ended up higher than the operating margin due to the sizable contribution from its associates and joint ventures.
- Jardine C&C’s topline has been growing at a healthy clip in the past five years, expanding at about 11.9% on an annual basis. However, revenue growth has stalled since its peak in 2012 where it made US$21.5 billion in revenue. For 2014, its revenue came in at US$18.7 billion.
- As of the end of 2014, Jardine C&C had about US$1.8 billion million in cash and equivalents, and US$5.7 billion in borrowings. This gives a cash to debt ratio of 0.32 times, which is well below Tom’s desired ratio of 1.5.
- As of the end of 2014, Jardine C&C had about US$1.8 billion in cash, $8.1 billion in current assets, and US$6.2 billion in current liabilities. This gave a borderline Foolish Flow ratio of 1.01. One reason for the borderline ratio is down to the high amount of current debtors (US$4.7 billion) that it holds in current assets.
- It is hard to determine the level of interest for each individual. As a conglomerate, Jardine C&C may be hard to untangle and may require more time to understand as a complete business.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Jardine C&C, we have a company that has grown its revenue base significantly over the past five years with a solid net margin. Revenue growth has faltered in the recent years, though, and it would be worth investigating for the reasons behind it.
The conglomerate also has a borderline Foolish Flow ratio, and a cash to debt ratio that is not ideal. As such, we should be keeping an eye on its operational results and how it translates to free cash flow.
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 Jardine C&C’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.