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 Golden Agri-Resources
With that, let’s run Golden Agri-Resources Ltd (SGX: E5H) 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 Golden Agri-Resources has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- Golden Agri-Resources is a vertically integrated palm oil outfit. In other words, the company owns oil palm plantations, mills to extract the oil from the harvested fruit, and the facilities needed to turn the extracted crude palm oil into industrial or consumer products like cooking oil, margarine, and shortening. On the account of its end products, we can consider Golden Agri-Resources’ business to be of the daily staple variety.
- In 2014, Golden Agri-Resources reported a gross margin of 17.2%.
- In the same year, Golden Agri-Resources had US$113.6 million in net profit attributable to shareholders and this represents a net margin of just 1.5%.
- Moving on to the top-line, Golden Agri-Resources’ revenue has grown by a zippy 27% annually between 2009 and 2014.
- As of 31 December 2014, Golden Agri-Resources had US$330 million in cash and cash equivalents, and US$3.1 billion in borrowings. This gives a cash to debt ratio of just 0.11, which is way below Tom’s desired figure of at least 1.5.
- As of 31 December 2014, Golden Agri-Resources had US$330 million in cash and cash equivalents, US$2.8 billion in current assets, and US$2.5 billion in current liabilities. This gives a Foolish Flow ratio of 0.98 which just about meets Tom’s preference for having the figure come in at 1 or below.
- It is hard to judge the level of interest for each individual, but the end products that Golden Agri-Resources supplies (like cooking oil and margarine) could make its business familiar to some investors.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Golden Agri-Resources, we might see a company with fast-growing revenue that sells everyday times and these can be nice things to have as investors.
But, the firm has a slim net margin (just 1.5% in 2014), which would mean it has very little room for error in its operations. The growing revenue may also have come at the cost of high borrowings given Golden Agri-Resources’ low cash to debt ratio.
That said, the firm’s Foolish Flow ratio fits Tom’s preference, so it may be adept at holding onto the cash which 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 Golden Agri-Resources’ current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.
For more (free!) 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.