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 ST Engineering
With that, let’s run the sprawling conglomerate Singapore Technologies Engineering Limited (SGX: S63) – or better known as ST Engineering – through the framework today.
As a conglomerate, ST Engineering has its fingers in many pies. Its major business segments include Aerospace, Electronics, Land Systems and Marine. This puts the conglomerate into a variety of sectors including defense, information communication technologies (ICT), and global maintenance, repair and operation (MRO).
Here’s how ST Engineering has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- The projects that ST Engineering work on tend to be sizable by nature, so it might not fit the trait of low priced, everyday items that Tom seeks. That said, the sheer variety of products and services offered, coupled with the variety of industries that the conglomerate operates in, suggests that there is a fair amount of stability in terms of sources of revenue.
- In 2014, the gross margin for ST Engineering came in at 20.2%.
- For net margin, ST Engineering clocked in a respectable 8.2% in the same year.
- Over the last five years, ST Engineering’ top-line has grown at a rate of 3.3% annually. It should be noted that sales decreased in 2014, coming in 1.4% lower than in 2013.
- As of the end of 2014, ST Engineering had $1.5 billion in cash and equivalents, and $1 billion in debt. This sets the cash to debt ratio at Tom’s desired ratio of at least 1.5.
- As of the end of 2014, ST Engineering had $1.5 billion in cash and equivalents, $5.3 billion in current assets, and $3.7 billion in current liabilities. This gives a borderline Foolish Flow ratio of 1.03 (anything below 1 is considered ideal). Part of the reason for the borderline Foolish Flow ratio is due to the higher inventory level that ST Engineering has to maintain.
- It is hard to judge the level of interest for each individual. But, it would be fair to say that the variety of businesses that ST Engineering operates in, coupled with the highly technical work that the company does, makes the firm fairly complex to analyze.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With ST Engineering, we might see a stalwart-like company with a slower revenue growth rate and an ability to earn a decent net margin. The number of sectors and countries the company operates in may also help provide a level of stability in its revenue.
On the other hand, ST Engineering has to maintain a high level of inventory to be able to execute its business. This results in a borderline Foolish Flow ratio. Thankfully, it has a strong cash to debt ratio to 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 ST Engineering’ 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.