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 Wilmar International Limited
With that, let’s run Asia’s leading agribusiness group Wilmar International Limited (SGX: F34) through the framework today. We will use figures from its financial year ended 31 December 2014 for this exercise.
The following’s a quick rundown of how Wilmar has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a sprawling conglomerate with multiple interests, Wilmar’s business activities include oil palm production, sugar milling and refining, biodiesel, fertiliser manufacturing, specialty fat, and many more. It has 450 manufacturing plants and a distribution network that spans more than 50 countries. With a network and business-reach like that, we can consider Wilmar’s offerings to be recurring in nature – and that’s a trait that Tom likes.
- For 2014, Wilmar reported a gross margin of just 8.9%.
- For 2014, Wilmar had US$1.1 billion in net profit, or a net margin of 2.7%.
- Moving on to the top-line, Wilmar’s revenue is up by 80% from US$23.9 billion in 2009 to US$43.1 billion in 2014; that seems healthy and impressive. But, it’s worth pointing out that the company’s revenue has stagnated since 2011; to that point, Wilmar’s revenue in 2014 is marginally lower than its revenue of US$44.7 billion in 2011.
- As of 31 December 2014, Wilmar had US$1.95 billion in cash and cash equivalents, and US$22.4 billion in borrowings. This gives a cash to debt ratio of just 0.08 which is way below Tom’s desired figure of at least 1.5.
- As of 31 December 2014, Wilmar had US$1.95 billion in cash and cash equivalents, US$24.5 billion in current assets, and US$19.2 billion in current liabilities. This gives a Foolish Flow ratio of 1.2, which is close to Tom’s requirement of having the figure come in below 1.
- It is hard to judge the level of interest for each individual, but the end products that Wilmar supplies to (like chocolates, which often have palm oil in their ingredients list) could make it familiar to some investors.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Wilmar, we might see a sprawling giant with a stagnant revenue base. The agribusiness group also has a thin profit margin of just 2.7% in 2014, which suggests that it has little room for error.
That said, the massive scale and relative stability of its revenue sources may offer support for its financials. This would be important as Wilmar’s balance sheet is not strong (it has a very low cash to debt ratio).
Eagle-eyed readers might notice that Wilmar actually has US$7.4 billion in total cash and bank balances (this includes the cash and cash equivalents of US$1.95 billion that was used to calculate the cash to debt ratio and the Foolish Flow ratio) as at 31 December 2014. But it must be noted that US$5.45 billion of that total was mostly pledged for secured loans.
Meanwhile, Wilmar’s Foolish Flow ratio is close enough to Tom’s criteria, but the company may have some work to do to be consistently free cash flow positive.
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 Wilmar’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.