Crunching The Numbers

When we pick the top European companies, we look beyond sales and earnings
The BusinessWeek 50

The Standard & Poor's Europe 350 is one of the leading indexes measuring the performance of major corporations in 17 Western European markets, including the 12 members of the euro zone. To understand how the companies in the S&P Europe 350 stock index stack up, take a look at the accompanying tables. These 350 stocks represent about 70% of the market value of all European equities and are chosen for the index according to their market capitalization and other factors. Here's how we computed our rankings of these top European companies:

The primary gauge of performance is growth in sales and earnings. Business-Week tallies these figures for the latest available 12-month period, but we also factor in three-year growth in order to reward those companies that keep on producing superior growth and profits over a longer term. Three-year growth rates can also provide a big boost for companies that completed large mergers or made major acquisitions during the measurement period, since the method compares companies' growth in sales and profits over the three-year period. The German utility E.ON, for example, benefited from recent acquisitions such as its purchase of Britain's Powergen in 2002 and German gas distributor Ruhrgas last year.

One seeming anomaly: Both the Dutch and British branches of Royal Dutch/Shell made the European BW 50 despite admissions that they had underreported their petroleum reserves, which triggered top-level resignations, shareholder lawsuits, and a U.S. Securities & Exchange Commission investigation that caused their stocks to take a hit. The Shell companies nevertheless made the list due to strong sales growth in both the one- and three-year periods.

To get a read on how well management is employing assets, we factor in net margins and return on equity. And shareholder returns for one- and three-year periods tell us how investors are scoring each company's results. Then we weigh the results for sales volume to make up for the fact that it is easier for small companies to score big percentage gains here than it is for large ones.

Each company in the S&P Europe 350 was evaluated according to the latest data available. However, 10 remained unranked because of incomplete data. Those that made it into the top 50 did not all have stellar years, and some companies that had a banner earnings year did not rank among the 50 top performers, which simply demonstrates that the rankings are meant to depict more than a single year of performance.

Started in 1998, the S&P Europe 350 index is now widely used as a benchmark for gauging the performance of Western European stocks. Standard & Poor's, like BusinessWeek, is a division of The McGraw-Hill Companies.

    Before it's here, it's on the Bloomberg Terminal.