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…
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 Mandarin Oriental
With that, let’s run Mandarin Oriental International Limited (SGX: M04) through the framework today.
For some background, Mandarin Oriental is a hotel operator with 27 hotels under its portfolio. This translates to close to 11,000 hotel rooms in 24 countries. You can read more about the company here.
Here’s how Mandarin Oriental has fared against Rule Maker framework (numbered in the same order as the seven criteria above):
- While a typical customer of Mandarin Oriental might not use hotel services daily, the scale of the company’s offerings with close to 11,000 hotel rooms suggests that there may be frequent usage from a variety of customers. One thing which investors might want to note is the presence of seasonality within the hospitality industry.
- For 2014, Mandarin Oriental reported an annual gross margin of 39.7%.
- For the net margin figure, Mandarin Oriental clocked in a nice 14.2% in the same year.
- Mandarin Oriental’s top-line has grown steadily by 10% per year on average over the past five years.
- As of the end of 2014, Mandarin Oriental had US$324.3 million in cash and equivalents, and US$727.7 million in debt. This sets the hotelier’s cash to debt ratio at 0.45 which is well below Tom’s desired ratio of at least 1.5.
- As of the end of 2014, Mandarin Oriental had US$324.3 million in cash and equivalents, US$426.3 million in current assets, and US$371.2 million in current liabilities. This gives a good Foolish Flow ratio of 0.27 (generally, anything below 1 is considered good).
- It is hard to judge the level of interest for each individual, but, it would be fair to say that the business of Mandarin Oriental (the running of hotels) would be familiar and easy-enough 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 Mandarin Oriental, we might see a company with a steadily growing revenue base. The hospitality industry tends to be seasonal, but the firm’s 11,000 hotel rooms across 24 countries may provide some level of stability in its revenue and cash flow. That would be good, as Mandarin Oriental earns a solid net margin.
On the flipside, the hotel operator has a weak cash to debt ratio due to its high level of borrowings. Thankfully, Mandarin Oriental has strong cash flow and a promising Foolish Flow ratio which helps keep its business humming along.
As a final note, it is important to understand that no one company is perfect.
With the characteristics defined above, the onus remains with the Foolish investor to decide if Mandarin Oriental’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.