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 MTQ Corporation
With that, let’s run MTQ Corporation Limited (SGX: M05) through the framework.
MTQ is primarily an oil and gas equipment and services provider. For some background, the business of MTQ Corporation can be organised into three different business units – the oilfield engineering division, the engine systems division and the Neptune division.
You can read more about the company here.
Here’s a quick rundown of MTQ Corporation for the Rule Maker framework (numbered in the same order as the seven criteria above):
- As an oil and gas equipment and services provider, MTQ Corporation thrives on large projects ordered from its customers. This wouldn’t be low cost projects that the customer will order on a daily basis – contrary to Tom’s criteria.
- For the first nine months of the financial year 2014 (FY 2014), the gross margin for MTQ Corporation came in at 32.1%.
- For the net margin, MTQ Corporation clocked in a relatively slim 5.2% for the first nine months of FY 2014.
- The nature of MTQ Corporation’s business means that its topline can be volatile. Compared to FY 2008’s revenue of $91 million, revenue has grown by a hefty 242%. However, much of the revenue growth started from FY 2011 when it commenced on its major Bahrain project in its oilfield engineering services segment.
- As of the end of 2014, MTQ Corporation had about $44 million in cash and equivalents, and $62 million in borrowings. This gives a cash to debt ratio of 0.71 times, which is well below Tom’s desired ratio of 1.5.
- As of the end of 2014, MTQ Corporation had $44 million in cash, $152.7 million in current assets, and $59.5 million in current liabilities. This gave a less desirable Foolish Flow ratio of 1.8. A major reason is down to the high trade receivables ($74.4 million) that it holds in current assets.
- The size and scale of projects that MTQ Corporation undertakes may require a strong technical background to have full understanding of its competitive advantages. Furthermore, with stake in three different businesses, MTQ Corporation 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 MTQ Corporation, we have a company that has grown its revenue base significantly in the past five years. That said, its net margins are fairly slim in the first nine months of FY 2014. It would be worth watching if higher revenue flows through to the bottom line for the company.
Furthermore, the company has not been able to turn out a good Foolish Flow ratio, indicating that we may need to keep an eye on the cash flow that the company generates. For the first nine months of FY 2014, MTQ had $10.9 million in free cash flow generated.
Finally, the cash-to-debt ratio is also not ideal so the operational chops of MTQ Corporation will have to carry most of the financial weight.
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 MTQ Corporation’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.