The companies that make it onto the FM's prestigious Top 20 list are ranked according to a close look at their historical financial performance and an assessment of their future prospects. We have stuck with our tried and tested methodology, though we are continuously examining different ways of doing it. Internally, it has occasionally been suggested that we use a more quantitatively based analysis, using techniques such as economic value added (EVA) or cash flow return on investment (CFROI). We have resisted this but remain open to being convinced.

Financial performance is measured by BFA McGregor, which aims to eliminate inconsistencies in the way companies report their financial performance by standardising treatment of the figures (see "Definitions"). One of the objectives is to identify companies that have a consistent track record in their performance. Numbers are considered over the long term - nearly a third of the overall score is derived from a five-year assessment of internal rate of return (IRR) and compound growth in earnings per share. IRR measures a company on its returns to shareholders - both dividend flows and capital appreciation in the share price.

This long-term view means that only companies that have been continuously listed for at least five years are eligible to be one of the Top Companies winners. So inevitably some worthy candidates - Spar and Telkom, for instance - are not included. Capitec makes its first appearance this year, having been listed in 2002.

We decided to reinstate the "R1bn hurdle" this year, after having dropped it last year. We omit companies with a market capitalisation of less than R1bn, the rationale being to ensure that we considered as potential blue chips only the companies that have the mass to be real investment prospects. The market has risen so far, so fast in the past couple of years that this hurdle now seems quite reasonable, hence its re-introduction.

We rank all qualifying companies by quantitative analysis of their past financial performance, using a combination of RoE in the latest year, IRR in share price over five years and EPS growth over five years. Using this as a filter mechanism, we reduce the list to the top 40 as finalists, and subject them to additional qualitative assessment. This is done by the FM's team of specialist investment writers.

They analyse the 40 companies and score them on a range of criteria. Each criterion is given a different weight. General investment writers then moderate the group and ensure that common standards are applied to all finalists.

The judges consider how the company is managed (and is likely to continue to be managed) by assessing corporate governance and the inherent strength of management.

For the past three years we have also considered commitment to black economic empowerment a key strategic driver for all SA companies.

A company may be profitable and well managed, but it is imperative to consider whether it is worth buying. To do that, we look at its share price, valuation and tradability. Companies whose great prospects have been more than fully priced by the market will fall down on this criterion.

We consider the profit prospects for companies in two ways. First we look at the prospects for the sector they operate in. Then we measure the company against its peers in that industry.

The scores from the FM team count for 60% of the final score, with 40% based on the quantitative analysis. The weighting is to ensure that our winners are based primarily on a forward-looking assessment. The Top 20 companies have not only done well, they are expected to continue to outperform.

Each year several companies that operate below the usual blue-chip radar screen, and perhaps don't trumpet their success, are scooped up by the Top Companies awards process. Examples this year are Capitec, Dawn (again) and Schamin (again) - companies that seldom make the headlines, but quietly run great operations.