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 Venture Corporation
With that, let’s run global contract manufacturer Venture Corporation Ltd (SGX: V03) through the framework today.
Venture derives its revenue from a variety of industries, including networking and communications, printing and imaging, retail store solutions and industrial products, test and measurement, and medical and life sciences. For this exercise, we’d be using figures from Venture’s financial year ended 31 December 2014.
You can read more about the company here.
The following’s how Venture has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- The different business segments of Venture offers diversity in revenue. However, the nature of contract manufacturing means that new projects from customers may not come every day and that runs counter to Tom’s preference. Furthermore, the industry Venture is in is also highly competitive in nature and that makes it an area of concern for investors.
- Venture did not report its gross margin in 2014. However, we can take note that the company generated $167.9 million in net cash from operating activities.
- For 2014, Venture had $139.8 million in profit attributable to owners. This represents a net margin of 5.7%.
- Sales growth is an area in which Venture has failed to shine: Between the years 2010 and 2014, revenue had hit a high of around $2.68 billion in 2010 and a low of $2.33 billion in 2013. The company’s revenue in 2014 had come in at S$2.47 billion.
- As of the end of 2014, Venture had $393 million in cash and equivalents, and $169 million in borrowings. This gives a cash to debt ratio of 2.3, which is well above Tom’s desired ratio of at least 1.5.
- As of the end of 2014, Venture had $393 million in cash, $1.5 billion in current assets, and $657 million in current liabilities. This gave a Foolish Flow ratio of 1.74. The main contributors to the company’s current assets include $557 million in trade receivables and $552 million in inventories. Both factors contrived to push Venture’s Foolish Flow ratio above Tom’s desired figure of below 1.
- Following Venture’s progress may require technological know-how and knowledge of the dynamics of its fast changing industry. This may make it harder for the common investor to follow.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Venture, we might see a company with a stagnant revenue base. As mentioned earlier, while the company does possess diversity in its revenue sources, it remains in a very competitive environment. Sustainable growth may be what we should look out for.
The company’s competitive business environment shows up in its tight net margin of 5.7% and a Foolish Flow ratio that does not meet Tom’s desired level. That said, the contract manufacturer has managed to maintain a healthy cash to debt ratio of 2.3 which may help it tide over rough patches and give it resources to try out different 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 Venture’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.