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 Fraser and Neave Limited
With that, let’s run the century-old Fraser and Neave Limited (SGX: F99) through the framework today. The business of Fraser and Neave (F&N) can be segmented into three major buckets: beverages, dairy products, and print and publishing.
We will use figures from F&N’s financial year ended 30 September 2014 (FY2014) for this exercise.
The following’s a quick rundown of F&N against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As a manufacturer and distributor of mass consumer products (this is alluded to by the names of its three business segments: Beverages; Dairies; and Print and publishing), we can consider F&N’s products to be affordable with recurring customers. This is a trait that Tom likes.
- In FY2014, F&N reported a gross margin of 34%.
- In the same year, F&N had $256 million in profit after tax which represents a net margin of 10.6%. It must be noted though that a significant chunk of the company’s profit stem from discontinued operations, therefore we may have to evaluate the company’s margins again once the dust clears.
- Moving on to the top-line, F&N’s revenue has shrunk significantly since 2009. In all fairness, the company has been in transition in the past three years with it first selling off its breweries segment and then executing a demerger of Fraser Centrepoint Ltd (SGX: TQ5). As such, there is less we can take away from F&N’s revenue track record here.
- As of 30 September 2014, F&N had $356 million in cash and equivalents, and $142 million in borrowings. This gives a cash to debt ratio of 2.5 which is above Tom’s desired figure of at least 1.5.
- As of 30 September 2014, F&N had $356 million in cash and equivalents, $1.1 billion in current assets, and $519 million in current liabilities. This gives a Foolish Flow ratio of 1.4, which fails to meet Tom’s preference of having the figure come in at 1 or below.
- It is hard to judge the level of interest for each individual, but the consumer products that F&N provides would likely be easy 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 F&N, we might see a company with a strong balance sheet that’s in the midst of a serious transition. Besides the aforementioned changes to its business, there’s also the high likelihood of a sale of F&N’s stake in Myanmar Brewery (the Myanmar-based beer brewer) taking place in the near future. Investors might have to size up F&N again after all the debris clears off.
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 F&N’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.