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 Singapore Press Holdings Limited
With that, let’s run media organization Singapore Press Holdings Limited (SGX: T39) – or better known as SPH – through the framework today. We will use figures from the firm’s financial year ended 31 August 2014 (FY2014) for this exercise.
You can read more about the company in here.
The following’s a quick rundown of how SPH has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- With multiple newspapers like The Straits Times, The Business Times, The New Paper and Lianhe Zaobao under its umbrella, SPH’s product offerings can be considered to be recurring in nature – that’s a trait that Tom likes. SPH also develops, owns, and manages retail malls; these malls generate revenue for the company in the form of rental income from tenants. The wide variety of tenants and regular rental payments also arguably give SPH’s property business the “every day” nature which Tom likes to see.
- In the case of SPH, we can use the operating margin as a proxy for the gross margin. In FY2014, SPH spotted a healthy operating margin of 28.3%.
- In the same year, SPH had $404 million in net profit attributable to shareholders, representing a net margin of 32.9%. The net profit was higher than operating profit partly due to higher contributions from SPH’s investments.
- Moving on to the top-line, SPH’s revenue has shrunk by 7% in total since FY2009.
- As of 31 August 2014, SPH had $443 million in cash and cash equivalents, and $1.8 billion in borrowings. This gives a cash to debt ratio of just 0.24, which is way below Tom’s desired figure of at least 1.5.
- As of 31 August 2014, SPH had $443 million in cash and cash equivalents, $1.64 billion in current assets, and $1.29 billion in current liabilities. This gives a Foolish Flow ratio of 0.93, which meets Tom’s requirement of having the figure come in at 1 or below.
- It is hard to judge the level of interest for each individual, but the newspapers that SPH provides and the retail malls under its banner could be familiar to most investors.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With SPH, we might see a media giant and retail mall owner with a shrinking revenue base. The chief culprit for the slide in revenue may be its traditional offline advertising business which continues to face disruption from the likes of online advertising.
That said, SPH still earns a healthy net margin of 32.9% for each dollar of revenue it brings in. Furthermore, the company’s Foolish Flow ratio is low enough to meet Tom’s criteria, and that’s a hint of its ability to generate free cash flow.
It may be important for SPH to maintain its healthy net margin and low Foolish Flow ratio as its balance sheet is not exactly in the best of health. With SPH’s mountain of debt, we may want to watch if the company is able to migrate its advertising services online and offer a compelling service for its customers. As my colleague Stanley Lim points out, SPH owns a whole list of successful high-traffic websites such as shareinvestor.com, Mudah.my, 701search, Sgcarmart.com, and Stproperty.sg.
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 SPH’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.