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 Wing Tai
With that, let’s run property developer and lifestyle company Wing Tai Holdings Limited (SGX: W05) through the framework today. Wing Tai is a major fashion retail player in Singapore and Malaysia. Beyond retail, a major part of the company’s revenue also comes from property development in Asia (68% of sales in the 12 months ended June 2014) and managing up-market service apartments.
You can read more about the company here.
The following’s how Wing Tai has fared against the Rule Maker framework (numbered in the same order as the seven criteria above). I’ll be using figures from the company’s financial year ended 31 June 2014 (FY2014) for this exercise:
- As mentioned, Wing Tai’s business has three distinct components to it. With 254 fashion stores at the end of June 2014, the fashion retail segment may have the characteristics to meet Tom’s requirements. The property development segment though tends to be lumpy in the terms of revenue-earned and that’s not a characteristic that Tom favors. The hospitality segment may lie somewhere in between.
- For FY2014, Wing Tai reported a gross margin of 44%.
- For the same year, Wing Tai had $254 million in net profit attributable to shareholders and that represents a handsome net margin of 31.6%.
- Wing Tai’s topline has grown by 58.4% in total since FY2009. But, that growth has come with more than its fair share of volatility; in its past five fiscal years, the firm’s revenue had hit a high of $1.3 billion in FY2013 and a low of $625 million in FY2012. For FY2014, revenue came in at $804 million.
- As of the end of June 2014, Wing Tai had $835 million in cash and equivalents, and $1.3 billion in borrowings. This gives a cash to debt ratio of 0.64 which is well below Tom’s desired figure of at least 1.5.
- As of the end of June 2014, Wing Tai had $835 million in cash and equivalents, $2.5 billion in current assets, and $512 million in current liabilities. This gave a Foolish Flow ratio of 3.2, which does not meet Tom’s requirement of a figure of 1 or below. Part of the reason for Wing Tai’s high Foolish Flow ratio is the $1.4 billion in development property that sits on its current assets.
- It is hard to judge the level of interest for each individual, but it’s logical to think that the fashion retail segment for Wing Tai may be easy to follow for most investors. The property segment on the other hand, may require a deeper knowledge of the industry.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Wing Tai, we might see a company with a volatile revenue base. On the other hand, Wing Tai had generated a juicy net margin of 31.6% in FY2014 and that may help make up for the volatility.
Additionally, the company has taken on a good chunk of debt to fund its growth, leading to a cash to debt ratio which falls below Tom’s criteria. Furthermore, Wing Tai’s Foolish Flow ratio also comes above one, meaning that the firm has some work to do in hanging on 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 Wing Tai’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.