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The Times 100: CALIFORNIA'S TOP COMPANIES

How We Put It Together : There Are Many Ways to Rank Firms--Including Our Subjective Mix of 5 Criteria

May 06, 1997|DANIEL GAINES | TIMES MARKETS EDITOR

The goal of this special tabloid is to put a filter across the stream of numbers that pour out of California's public companies every year, capture the most important information, and use it to present a snapshot of the health of the state's key businesses.

As is true in school, work and life in general, subjectivity is an issue here. There are many ways to rank businesses, and what is "fair" in comparing companies is in the eye of the beholder.

This article explains how, and why, we did what we did.

The Times 100

This is the second year we've used a proprietary system to create the primary Times 100 list (on Pages 6 and 7). These companies, led this year by Intel Corp., have the best average rankings across five key criteria.

Any ranking system is, of course, arbitrary. Our Times 100 list seeks to identify California-based companies that are the "most successful" right now, but it is not intended to predict the future.

Indeed, other lists in this section, such as Sales 100, Sales Growth 100 and Stock Price Gain 100, may do a better job of pointing to specific companies that have the greatest momentum in terms of sales, earnings, investment return and other barometers of success.

The official Times 100 list, in contrast, is derived from a subjective mix of five criteria we chose. Those measures are described in detail below.

Last year, after the initial use of this proprietary system, we sent the Times 100 section to 65 economists across the state and asked for their opinions. They made many suggestions, some of which are reflected in this year's section.

Despite the arbitrary nature of the Times 100 ranking system and their own quibbles, most who wrote back told us to keep the system.

"I like it because I have a strong preference for simplicity and transparency in matters like this," wrote Alan Williams, an economist at Rand Corp. in Santa Monica.

"The Times 100 is an informative and well-constructed piece," wrote Walter W. Perlick, dean of the School of Business Administration at Cal State Sacramento.

Some economists suggested weighting or normalizing the rankings, but we found this would not have made much difference in the results.

A few economists questioned using the one-year stock price change as one of the factors, because, as William P. Jennings at Cal State Northridge put it, "it may tend to give undue importance to companies that previously did badly, were the subject of takeover rumors near the end of the year or other factors which are not what the Times 100 list is looking to reward."

Kon Lai, at Cal State Los Angeles, made a similar point: "Share prices can be influenced excessively by investors' sentiments, especially over the short term."

These comments gave us pause, but in the end we decided to continue using stock price as one of the five criteria, in part because it reflects investors' emotions about individual companies.

*

To generate the Times 100 list, we first start with companies that have reached a certain critical mass: From a total of 1,117 public California companies, we cut that list about in half, by requiring a company to have at least $50 million in annual sales, $25 million in shareholder equity, two consecutive years of positive return on equity and a continuous share price history.

Those companies then were ranked by the five main criteria, and the ranks were averaged to produce a final score for each company. The lowest (i.e., best) score, Intel's, was 27.8, which means that 27.8 was its average rank among the five categories.

As with the blind men describing the elephant, each factor tells only part of the story, but combined, they reveal a fuller picture of a company's success.

The five measures used in the Times 100 list:

* Market capitalization as of April 18. This is a company's stock price times the number of shares outstanding.

Unlike "book value," which is the theoretical liquidation value of a company's assets, market cap reflects what investors think a company is intrinsically worth. As such, it can vary tremendously depending on how glum or optimistic Wall Street feels.

* Total sales. As with market cap, companies with higher total sales will rank higher on our list, all other things being equal. Sales are a basic measure of a company's success because they tell you the size of the market for a company's products or services.

But of course, this measure makes no distinction between a high-sales company that is stagnating and one that is still growing. And a company may have high sales, yet generate little profit on those sales.

* Sales growth. We measure the percentage change in sales in the most recent four quarters, most often calendar year 1996, versus the previous four. The bigger the increase, the higher a company's ranking, all other things being equal.

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