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 Thai Beverage
With that, let’s run food and beverage purveyor Thai Beverage Public Company Limited (SGX: Y92) through the framework today. The maker of the popular Chang brand of beers operates mainly out of Thailand. We’ll be using Thai Beverage’s financial figures for its fiscal year ended 31 December 2014 for this exercise.
Here’s a quick rundown of how the company has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- Thai Beverage offers more than just Chang beer; in fact, its Spirits business segment (a different type of alcoholic beverage to beer) made up 64% of total sales in 2014. With 400,000 point of sales in Thailand alone, Thai Beverage’s products can be seen as a regular, nearly everyday item for thousands of customers (I wouldn’t recommend alcohol on a daily basis though!) – and that’s a preferred characteristic for Tom.
- In 2014, Thai Beverage reported a gross margin of 29%.
- During the same year, Thai Beverage had THB 21.4 billion in net profit and that represented a handsome net margin of 13.2%.
- Thai Beverage has managed to grow its revenue by 8.6% per year on average since 2009.
- As of the end of 2014, Thai Beverage had THB 2.23 billion in cash and equivalents, and THB 49.5 billion in borrowings. This gives a cash to debt ratio of just 0.045 which is way below Tom’s desired figure of at least 1.5.
- As of the end of 2014, Thai Beverage had THB 2.23 billion in cash, THB 47.1 billion in current assets, and THB 36 billion in current liabilities. This gave a Foolish Flow ratio of 1.25. Generally, we’d like to see the ratio come in below 1.
- It is hard to judge the level of interest for each individual, but the beverages (beer, spirits, and non-alcoholic types like bottled water and soft drinks) and snacks that Thai Beverage paddles would be 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 Thai Beverage, we might see a company with a steadily growing revenue base. What’s more, the growing revenue came with a nice net margin of 13.2% in 2014.
That said, the company has taken on a good chunk of debt to fund its growth, leading to a cash to debt ratio which falls outside of Tom’s criteria. The company’s less-than-ideal Foolish Flow ratio of 1.25 also suggests that the firm may not be able to hang on tightly to the cash that flows through its coffers.
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 Thai Beverage’s current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.
For more stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Like us on Facebook to follow our latest hot articles.
The Motley Fool's purpose is to help the world invest, better.
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.