At the Motley 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
At the Motley 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 CapitaLand
With that, let’s run real estate juggernaut CapitaLand Limited (SGX: C31) through the framework today. CapitaLand has five strategic business units, namely, Capitaland Singapore, Capitaland China, CapitaMalls Asia, Ascott, and Corporate and Others. You can read more about the company in here.
For this exercise, we’ll be using figures from CapitaLand’s financial year ended 31 December 2014.
The following’s a quick look at how CapitaLand has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- The different business segments of CapitaLand offers geographical diversity in terms of sources of revenue. However, the nature of real estate development would mean that new projects will not be launched on a daily basis..
- In 2014, CapitaLand had a gross margin of 35.2%.
- For the net margin figure, CapitaLand clocked in a healthy 44.8% in 2014. During the year, the real estate outfit made almost $970 million in income from its associates and joint ventures and this helped send its net margin higher than its gross margin.
- CapitaLand’s revenue has grown by 5.8% annually since 2009. It has not been a smooth ride for the firm though – CapitaLand saw its revenue dip 11% in 2011 before rebounding 9.3% in 2012.
- As of the end of 2014, CapitaLand had $2.7 billion in cash and equivalents, and $16 billion in borrowings. This gives a cash to debt ratio of 0.2 which is way below Tom’s desired ratio of at least 1.5.
- As of the end of 2014, CapitaLand had $2.7 billion in cash, $11.6 billion in current assets, and $7 billion in current liabilities. This gave the firm a Foolish Flow ratio of 1.27, which is above Tom’s desired ratio of below 1. The main contributor to CapitaLand’s current assets include $7.7 billion in development properties.
- Following CapitaLand’s progress may require knowledge about the dynamics of the cyclical real estate 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 CapitaLand, the number which jumps out at investors would be its sweet net margin of 44.8%. This figure would be important as its industry has been historically cyclical. We have also seen CapitaLand grow its revenue over the past five years, though it’s worth pointing out that the firm has seen its share of bumps along the way.
The real estate company also maintains a hefty $16 billion in debt on its balance sheet. As such, it may be important for the company to secure as much profits as possible for each project it has in order to fund future project launches.
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 CapitaLand’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.