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 Sheng Siong
With that, let’s run Sheng Siong Group Ltd (SGX: OV8) through the framework today. Sheng Siong is a grocery and fresh food supermarket retailing chain and a household name in sub-urban Singapore. We will use the company’s financials for the year 2014 in this exercise.
You can read more about the company here.
The following’s a quick rundown of how Sheng Siong has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a retailer, Sheng Siong provides goods through its 35 outlets around Singapore that are used every day by thousands of consumers. The items sold are also often low-priced and within reach of the general consumer.
- The gross margin for Sheng Siong in 2014 came in at 24% and that’s lower than the selfsame figure of 30% that Sheng Siong’s rival Dairy Farm International Holdings Ltd (SGX: D01) had for the same period.
- For the net margin figure in 2014, Sheng Siong clocked in 6.6% while Dairy Farm’s was only 4.5%.
- Sheng Siong’s top-line has grown by 3.7% annually over the past four years.
- As of the end of 2014, Sheng Siong had $130.5 million in cash and equivalents, and no debt. This gives a cash to debt ratio which is well above Tom’s desired figure of at least 1.5.
- As of the end of 2014, Sheng Siong had $130.5 million in cash, $184.4 million in current assets, and $106.5 million in current liabilities. This gave a good Foolish Flow ratio of 0.50 (generally, anything below 1 is considered ideal), meaning that Sheng Siong is able to hang onto most of the cash which flows through its coffers. Part of the reason is because Sheng Siong mostly gets paid by consumers at its check-out counter and receives those payments quickly and yet is able to hold off paying its suppliers until much later.
- It is hard to judge the level of interest for each individual, but the everyday items that Sheng Siong sells would be familiar and easy 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 Sheng Siong, we might see a company with a slow but steadily growing revenue base. The nature of the everyday items sold in the company’s supermarkets also provides stable cash flow and a reasonable net margin. Sheng Siong also excels at hanging on to the cash which flows through its business, and this can be seen by its strong cash to debt ratio.
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 Sheng Siong’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 Dairy Farm International Holdings.