There are plenty of business rankings out there. Top Companies, though, is one of the few to choose its winners without fear or favour, using both quantitative and qualitative measures.
In the past two issues, Top Companies has announced award winners alongside its normal ranking of companies on various performance indicators. Until now, it was a completely quantitative measurement based on the historic financial and share price performances of the companies.
Purely quantitative measures have a huge weakness. Because they are based purely on historic data, they don't reflect current views of a company's future. And they don't directly reflect current SA business priorities, such as corporate governance or transformation.
That's why the now disgraced Tigon made it on a number of rankings, even recently, just as Enron was once number three on the Fortune 500 in the US.
On the other hand, purely qualitative rankings have their weaknesses. Whether based on an editorial view or a survey of the marketplace, they suffer from selective adjudication. They tend to be biased towards companies that invest in building their profile. In some circumstances, they can be biased towards companies with which a publication has a business relationship.
The FM has tried to balance quantitative and qualitative analysis.
First we identified 40 finalist companies, among the 400-odd listed companies on the JSE.
We gave a 40% weighting to the five-year internal rate of return of the share price - an indicator of the returns shareholders have enjoyed over five years. This performance is captured in the Top Performers table starting on page 147.
We then gave another 40% weighting to compound annual growth in earnings per share for the past five years - measuring a company's actual financial performance.
The remaining 20% weighting was for the latest year's return on equity, to ensure the companies were current winners.
Other measures used five years' numbers, to ensure that the winners had a solid track record.
Finally, we excluded all companies with a market cap of below R1bn.
That process identified 40 finalists.
The FM's investment team then set about forming a qualitative view on those companies. Various specialist journalists and general investment writers gave their views on corporate governance, management strength, investor communication, investability (volumes traded and value buy at current prices), industry profit prospects and the prospects of the individual company.
The qualitative view took a 60% weighting in arriving at our 20 winners. Finally, the maths was checked by accounting firm Gobodo.
In the end, the various elements were weighted as shown in the graphic alongside. The total qualitative and quantitative scores are shown between pages 16 and 17.
The result is 20 companies that have proven themselves over time and, in the FM's view, show great future prospects.
