We learned some lessons from past rankings and made some changes to our methodology
Any method for ranking companies will by necessity be imperfect. But for this year's European BW 50 list, we have tweaked our methodology to better identify top performers, applying some of the lessons we've learned over the past 10 years.
First, we focused on two core financial measures, average return on capital and sales growth, both taken over the previous three years. For our measure of profits we used earnings before taxes. The earnings measure also excludes distortions from nonoperating items as defined by our data provider, Standard & Poor's Compustat. We then put these profit numbers into context by figuring them as a percentage of the value of invested capital, basically long-term debt and shareholder equity. For financial companies, we calculated return on shareholder equity using pretax profits as our earnings measure, to better align our figures with the nature of the finance sector. For our measure of sales growth for nonfinancial companies we included gains from operations and from mergers and acquisitions, as reported by Compustat. For financial companies, we used asset growth instead.
Second, we compared companies with others in their sectors.(Ten sectors cover the companies in the Standard & Poor's Europe 350 stock index.) This break from our past practices enables us to identify companies that are good performers relative to their peers, even if their sector of the economy is not booming. This avoids the situation, for example, where oil companies jump to the top of the list when oil prices are rising and then drop off the list when oil prices are falling.
Within each sector we ranked companies separately by our two measures—return on capital and growth—and then combined the numerical rankings, giving substantially greater weight to return on capital. The top company in each sector, according to the combined ranking, was given a 1, and the bottom company received a 0, with all the intermediate companies receiving a score according to their ranking
A list was then constructed of all the companies we analyzed, according to their scores. We applied a tie-breaker where necessary. Finally, this list was reviewed by a panel of editors and correspondents, applying one thing we learned from 10 years of compiling the BW50: Financial measures applied mechanically sometimes miss the mark. Based on discussion, the panel made a small number of adjustments in the ranking.