What makes for a top-performing company? Strong profit growth, for sure. Bountiful returns for shareholders. But these basics only tell part of the story. A company can ride the business cycle to a year of great earnings, after all. And the Internet boom taught us how fleeting stock valuations can be.
Seven years ago, when BusinessWeek set out to rank Corporate America's best performers, we wanted to capture both momentum and sustainability. So we came up with a 10-part formula for analyzing the companies in the Standard & Poor's 500-stock index, a group that represents 77% of the total market capitalization of all U.S. stocks. The result has been a constantly evolving list of names.
As always, the first gauges of performance in our rankings are sales and earnings growth. We tally both for the most recent 12-month period, but we also factor in three-year growth to reward managements that keep building on a great record. We consider net profit margins and return on equity to judge how efficiently each corporation manages its resources. And to better understand how investors perceive each company's results, we factor in shareholder returns for one- and three-year periods.
We weight the results for sales volume. This is to acknowledge that it's easier to generate fast growth off a smaller base. And last year, we began factoring in the debt-to-capital ratio -- a good measure for determining which companies are best positioned to make it through tough economic times. Those companies that register solid earnings growth without relying on debt-fueled acquisitions score well on this measure.
To compute letter grades for our Performance Ranking, we divide company results on each of those measures on the report card into quintiles. The companies making up the top 20% of each category are assigned a letter grade of A, the next 20%, B, and so on. The result: a detailed corporate report card for every S&P 500 representative. For those interested in seeing how individual companies stack up against their peers, we've also put together Industry Ranking tables using some of the BW50 criteria.
Many of the companies on this year's BW50 managed to make it despite not having top scores across the board. A few, such as Dell (DELL ), Johnson & Johnson (JNJ ), and Bed, Bath & Beyond (BBBY ), even pulled an F in one category. But you can bet they're making up the difference elsewhere. There are no slackers in this crowd.
By Jessi Hempel in New York