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 Genting Singapore
With that, let’s run integrated resort owner Genting Singapore PLC (SGX: G13) through the framework today. The majority of Genting Singapore’s revenue, of course, comes from its casino located within its flagship Resorts World Sentosa. We will mostly be using figures from the company’s financial year ended 31 December 2014 for this exercise.
You can read more about the company here.
So, here’s a quick rundown of how Genting Singapore has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- In the first quarter of 2015, Genting Singapore reported that the average daily number of visitors to its attractions was “about 16,000”. The sizable visitor count suggests that Genting Singapore has a level of repeatability in sales.
- The gross margin for Genting Singapore in 2014 came in at around 24%. This was lower than the 30% recorded for the previous year.
- For the 2014 net margin, Genting Singapore clocked in a healthy 18.6%.
- Genting Singapore’s 2014 top-line was 4% higher compared to where it was in 2010. Its revenue, though, has been fluctuating over the past four years. Between 2010 and 2014, revenue had hit a high of $3.2 billion in 2011 and a low of $2.8 billion in 2013.
- As of the end of 2014, Genting Singapore had $3.7 billion in cash and equivalents, and $1.7 billion in borrowings. This gives a cash to debt ratio of 2.2 which is above Tom’s desired figure of at least 1.5.
- As of the end of 2014, Genting Singapore had $3.7 billion in cash, $6.3 billion in current assets, and $1.5 billion in current liabilities. This gave a Foolish Flow ratio of 1.7. A large part of the resort owner’s current assets consists of trade and other receivables as well as “available-for-sale financial assets” ($1.1 billion and $1.3 billion respectively). This contributed to Genting Singapore’s Foolish Flow ratio rising above Tom’s benchmark of below one.
- It would be fair to say that the attractions and casino operations of Genting Singapore would be familiar for most investors.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Genting Singapore, we might see a company with a stagnant or slow-growing revenue base. In fact, my colleague Stanley noted that Genting Singapore’s revenue for the first quarter of 2015 had fallen by a shocking 23%. As Foolish investors, we should be looking at whether the number of visitors flowing through the company’s attractions and casino can provide a level of stable revenue and cash flow.
On the other hand, Genting Singapore still generates a healthy net margin. While the Foolish Flow ratio does not meet Tom’s desired levels, the casino operator has a strong balance sheet with a cash to debt ratio of 2.2 and that financial strength may give the company options for the future.
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 Genting Singapore’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.