At the Fool, we believe that in order to find good shares to invest in, we have 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, we have 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 ARA Asset Management
With that, let’s run ARA Asset Management Limited (SGX: D1R) through the framework today.
For a quick introduction, the company manages real estate investment trusts, private real estate funds, as well as physical properties. The company’s source of revenue comes from four business segments: Management Fees; Acquisition, divestment and performance fees; Finance income; and Other income.
Some Singapore-listed real estate investment trusts (REITs) which are under ARA Asset Management’s care include Fortune Real Estate Investment Trust (SGX: F25U), Suntec Real Estate Investment Trust (SGX: T82U), and Cache Logistics Trust (SGX: K2LU).
So, here’s how ARA Asset Management has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a player in the property management and real estate fund management sectors, ARA Asset Management gets paid recurring management fees. While it does not exactly provide the low priced, everyday items which Tom prefers, the stability of the recurring revenue that it has might interest him.
- We can use operating margin as a proxy for the gross margin in this case. For 2014, ARA Asset Management reported a very healthy annual operating margin of 57.4%.
- For the net margin figure in 2014, ARA Asset Management clocked in an attractive 52.4%.
- ARA Asset Management’s top-line has grown steadily at a compound annual rate of 18.2% over the past five years.
- As of the end of 2014, ARA Asset Management had $64.4 million in cash and equivalents, and $34.4 million in debt. This sets the cash to debt ratio at 1.9, which is nicely above Tom’s desired ratio of at least 1.5.
- As of the end of 2014, ARA Asset Management had $64.4 million in cash and equivalents, $146.4 million in current assets, and $78 million in current liabilities. This gives a borderline Foolish Flow ratio of 1.05 (in general, anything below 1 is considered good).
- It is hard to judge the level of interest for each individual, but it could be fair to say that the business of ARA Asset Management would be familiar 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 ARA Asset Management, we might see a company with revenue that’s been growing at a healthy clip. The recurring nature of its management fees also provide a stable base of revenue. As icing on the cake, ARA Asset Management also earns an attractive net margin.
On the flipside, ARA Asset Management spots a borderline Foolish Flow ratio. This is in part due to a sizable holding of financial assets comprising of REIT units that the firm receives as part of its management fees from the various REITs it manages. That said, ARA Asset Management still has healthy free cash flow despite its less-than-ideal Foolish Flow Ratio, so that’s good.
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 ARA Asset Management’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 owns shares in ARA Asset Management.