At the Fool, we believe that finding good shares to invest in first starts 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…
At the Fool, we believe that finding good shares to invest in first starts 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 SATS Ltd
With that, let’s run food catering giant SATS Ltd (SGX: S58) through the framework today.
The company, which has an attractive dividend yield of 4% at its current price of S$3.46 (thanks to its annual dividend of S$0.14 per share in its last-completed fiscal year) has two major business segments, namely, Food Solutions and Gateway Services.
The Food Solutions segment covers airline catering, food distribution, industrial catering and other services. Meanwhile, Gateway Solutions is involved with ground handling services of passengers, flights, and cargo.
You can see below a quick rundown of how SATS has fared against the Rule Maker framework (numbered in the same order as the seven criteria above). The figures used in this exercise are from SATS’s fiscal year ended 31 March 2015 (FY14/15):
- SATS mainly provides catering services, flight and ground services, and food distribution. While contracts for its businesses may not come on a daily basis, the nature of its business is diverse and can be considered recurring. These are traits that Tom likes.
- We can use SATS’s operating margin as a proxy for its gross margin. In FY14/15, SATS reported an operating margin of 10.5%.
- In FY14/15, SATS had $51.6 million in net profit and that gives the catering outfit a respectable net margin of 12.1%. The company’s net margin was notably boosted by the share of results from its associates and joint ventures and ended up higher than the operating margin.
- Moving on to the topline, SATS’s revenue has inched up by around 2.6% annually since FY09/10. It’s worth pointing out that SATS’s revenue had dipped by 2% year over year in FY14/15.
- As of the end March 2015, SATS had $429.7 million in cash and equivalents, and $105.3 million in borrowings. This gives a cash to debt ratio of 4.1 which is well above Tom’s desired figure of at least 1.5.
- As of the end March 2015, SATS had $429.7 million in cash and equivalents, $792.7 million in current assets, and $345.8 million in current liabilities. This gives a borderline Foolish Flow ratio of 1.1, which is close to Tom’s preference for a figure of 1 or below.
- It is hard to judge the level of interest for each individual, but the nature of the services that SATS provides could 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 SATS, we might see a company with a stagnating revenue base.
That said, the catering giant managed to earn a healthy net margin of 12.1% for each dollar of revenue in its last fiscal year. SATS is also financially strong with a cash to debt ratio which easily exceeds Tom’s criteria. Meanwhile, the borderline Foolish Flow ratio of 1.1 also hints at SATS’s ability to generate positive free cash flow.
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 SATS’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.