Each week The Motley Fool highlights a company on its radar. This week we look at Thorn.

Thorn Group Limited (ASX:TGA) is best known for its national store networks, Radio Rentals and Rentlo. Thorns core business is the rental and sale of household goods. It also provides unsecured cash loans to struggling Australians.

Thorn has embraced online retailing through BigBrownBox.com.au. [Update: Thorn has exited its online venture]. It also has fingers in a couple other pies as it strives to be Australia’s leading provider of financial services to niche retail and commercial markets.

A key show stopper when looking at financial service firms is elevated debt levels. Thorn effortlessly clears that first hurdle.

Thanks to investors who paid $1.85 per share during June’s renounceable rights offering, Thorn has a strong balance sheet. We applaud Thorn for being one of the all too few companies to make its rights renounceable. That is the fairest way to raise new capital from shareholders.

A recipe for business success

Start with a solid business with a long history. Radio Rentals was 70 years old when it listed on the ASX in 2006. Since listing it has grown equity at 15% per year.

Increase revenue

Revenues have grown solidly over the last five years, at over 12% per year. Better yet, the majority of revenues are of the highly desirable recurring nature. With rentals contracts averaging two years, management has excellent visibility of forward revenue.

Increase margins

The following chart shows how an 8.6% increase in revenue in 2011 resulted in a 31% increase in Thorn’s EBITDA – earnings before interest, taxes, depreciation and amortisation. Operating leverage results in more of each extra dollar of revenue flowing through to earnings.

Thorn Group Limited. (ASX:TGA) Increases margins

A dash of acquisition

Thorn bought National Credit Management Limited in March for a reasonable price. The price tag of $32.5 million, represented a fair multiple of 5.2x EBIT – earnings before tax and interest. NCML is a leading provider of integrated receivables management services in Australia.

A recipe for investing success

Add a pinch of recognition and a wide margin of safety to business success.

Thorn was added to the S&P/ASX300 index in September and has been on the radar of value investors for a few years.

Thorn has one of the highest margins of safety on my watchlist. I value Thorn at around 40% higher than its current $1.60 price tag. It’s attractive without being a table pounding buy.

In the rear-view mirror

As this three year chart shows Thorn was well rewarded by investors for its consistent earnings growth. Or at least it was until April this year. Thorn is down 30% since then as investors have turned fearful.

Source: S&P Capital IQ

Management recently announced good performance and growth in Thorn’s core business. That growth, along with NCML’s accretive earnings, may see Thorn increase earnings per share this half, despite the 12.5% dilution from the rights offer.

Foolish bottom line

Thorn is a well-managed company available at a good discount. It deserves a place on our radar. At the very least Thorn should be compared to your existing holding. Now is a good time to trade up to better quality companies.

The best opportunity to load up on Thorn could come courtesy of Europe. Whether or not Thorn is still a growth baby at 74 years old won’t matter if GFC2 hits — the sovereign crisis. As a finance company, Thorn will be thrown out with the bathwater. That’s the kind of circumstances that yields potential multi-baggers.

This article contains general investment advice only (under AFSL 400691).

Dean Morel is The Motley Fool’s Investment Analyst. Dean has no position in Thorn Group. The Motley Fool’s purpose is to educate, amuse and enrich investors. Readers can click here for a free Motley Fool report titled Read This Before The Next Market Crash

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