03/30/19 HOW WE PICKED THE CREAM OF THE CROP

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HOW WE PICKED THE CREAM OF THE CROP

What makes for a top corporate performer? That's what BUSINESS WEEK set out to discover last year when we introduced our all-new Performance Rankings and its centerpiece, the BUSINESS WEEK 50--the best overall performers among the S&P 500 companies. Our aim was to go beyond static lists that rank companies by sheer size or market capitalization. Instead, we created a dynamic, growth-oriented measure that would truly reflect--and reward--companies that consistently perform better than their peers.
So how did we calculate our Performance Rankings? We began with two of the most important factors investors use to judge performance: top-line revenue growth and earnings growth. We then added total returns, a key measure of how well management is performing for shareholders. Since it is much harder to sustain growth than sprint for a few quarters, we tallied all three of those crucial rates over both one- and three-year time spans. Finally, we added two important indicators of the returns management earns from its assets: net margins and return on equity, both for one year. After all, what good is growth if it doesn't pay off financially?
Using those criteria, we evaluated each of the companies in the closely watched Standard & Poor's 500-stock index. S&P is owned by The McGraw-Hill Companies, which also owns BUSINESS WEEK. Why the S&P 500? Because it is a universally accepted measure for stock performance, both on Wall Street and among small investors. Its 500 companies together comprise 70% of the market value of U.S. stocks.
The results give an in-depth look at how these companies really stack up against one another. Who had the best--or worst--three-year shareholder return among the 500? The best net margins? Answers to those questions and more can be found in the tables throughout this package.
But that's only a start. We also graded the 500 companies on each of the eight criteria, based on how well each performed against other companies in the index. For each measure, the top 20% of companies earned an A, the next 20% got a B, and so on down to the Fs in the bottom 20%. The handful of S&P companies for which data was not available got incompletes.
Finally, to get our overall Performance Ranking of the 500--and select the elite that make up each year's BW 50--we averaged together the individual rankings each company received for the different criteria. Then, to recognize that it's much easier for small companies to score big percentage gains than it is for big companies, we weighted them by sales volume.
The result is our overall Performance Rankings, which starts on page 91. The same criteria form the basis for each company's ranking within its sector; our Industry Rankings tables begin on page 123. Together, they form an annual corporate report card. At the top are the stars of the dean's list. At the bottom are the laggards: those that would be well advised to hit the books a little harder this year.
By Dan Beucke in New York

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