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 Japan Foods
With that, let’s run Japan Food Holdings Ltd (SGX: 5OI) through the framework today. As a purveyor of mostly Japanese cuisine, Japan Foods serves up affordable Japanese fare like ramen through its Ajisen and Menya Musashi outlets and gyoza through its Osaka Ohsho outlets.
You can read more about the company here. We will use the figures from the firm’s financial year ended 31 March 2014 (FY2014) in this exercise.
The following’s a quick rundown of how Japan Foods has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- With 64 outlets under its umbrella (consisting of both self-owned and franchised stores), Japan Foods provides affordable Japanese fare which is accessible to the general consumer.
- The gross margin for Japan Foods in FY2014 came in at a hearty 81.6%.
- For the net margin in FY2014, Japan Foods clocked in a good 11.6%.
- Japan Foods’s top-line has grown by 13% annually over the past five years. That said, top-line growth in FY2014 was slower, coming in at just 2.4%.
- As of 31 March 2014, Japan Foods had $16.8 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 31 March 2014, Japan Foods had $16.8 million in cash, $23.1 million in current assets, and $8.3 million in current liabilities. This gave a good Foolish Flow ratio of 0.76 (generally, anything below 1 is ideal), meaning to say that Japan Foods is able to hang onto most of the cash which flows through its coffers.
- It is hard to judge the level of interest for each individual, but the Japanese fare that Japan Foods provides should 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 Japan Foods, we might see a company that has been able to grow its revenue base at a good pace. The affordable nature of its Japanese fare also provides stable cash flow with good net margins.
On top of that, Japan Foods excels at hanging onto the cash which flows through its business too, and this is seen in its strong cash to debt ratio and Foolish Flow ratio. Part of the reason is because Japan Foods mostly gets paid by consumers at its check-out counter, but is able to hold off paying its suppliers until much later.
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 Japan Foods’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.