What makes a company a top corporate performer? Obviously, it must have a record of strong earnings and revenue growth, and a stock price to match. But what about return on equity? Or efficiency? Four years ago, BusinessWeek decided to take a more rigorous approach to measuring performance. That's when we introduced the Performance Rankings and their centerpiece, the BusinessWeek 50--our list of the best overall achievers among the Standard & Poor's 500 companies. The aim was to give readers something more useful than simple rankings that list companies by annual revenues or market capitalization. Instead, we created a dynamic, growth-oriented measure that would identify--and reward--companies that consistently outperformed their peers.
Nine ingredients go into our Performance Rankings. We begin with two of the most important factors that investors use to judge performance: revenue growth and earnings growth. Next, we add total returns--stock-price movement plus dividends--which is a key measure of how well management is performing for shareholders. Since it is much harder to maintain steady growth than to sprint for a few quarters, we tally all three of these crucial rates over both one- and three-year time spans. Then we mix in two key indicators of how efficiently management uses 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? Those calculations are based on financial information available as of Feb. 28, and the closing stock prices on that date. Finally, to recognize that it's easier for small companies to score big percentage gains than it is for big companies, we weight the results by sales volume. We evaluate each company in the S&P 500, which represents nearly 80% of the market value of U.S. stocks. Standard & Poor's Corp. is owned by The McGraw-Hill Companies, which also owns BusinessWeek.
The process doesn't stop there. We also give letter grades to each of the 500 companies, based on how well they performed against other companies in each category. For each Performance Ranking measure, the top 20% of companies earn an A, the next 20% get a B, and so on, down to the F's in the bottom 20%. The handful of S&P companies for which data isn't available gets incompletes. Keep in mind that a company that blows out the stops in one category--say, earnings growth--but scores a B in another area can wind up with a higher overall ranking than an outfit that scores straight, but less spectacular, A's. Finally, to see how the companies stack up against their peers, we break the overall rankings down by industry. Those Industry Rankings provide the numbers behind the Performance Rankings.
Our goal is to provide a sophisticated look at how these companies really compare. Who had the best three-year shareholder return? The worst net margin? The result is a detailed corporate report card. At the bottom are the slackers, whose managers probably should be doing a lot more homework. At the top are the stars. Their only worry: how to stay on the dean's list as a sliding economy turns the performance test into a real grind.
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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