‘Inc’ magazine’s annual survey (PDF)
When ‘Inc.’ decided to wade into the unchartered waters of midsize enterprises in India, it had a choice to make between looking at sales growth over a period of time and studying the overall performance of a company.
Sales, after all, isn’t the only indicator of how well a company is doing. Eventually, to assess high growth, it chose companies with net sales between R50 crore and R1,500 crore in the most recent year. To begin with, it created a master list of more than 3,000 companies across 35 sectors.
Of this list, nearly 40% were dropped for lack of requisite data. Banks and financial institutions were excluded, and so were public sector units (PSUs). The rationale was that it’s difficult to define revenue for the former, and PSUs can hardly be considered independent entities with commercial objectives.
The set of companies went through a weighted analysis of the following financial parameters, annualized for comparison:
1. Revenue growth
2. Net income growth
3. Profitability, and
To evaluate the “performance” of these companies, the ranking model took into account net sales, operating profits and profit after tax for each company for the past three calendar years—2007 to 2009— and added up the relevant quarterly data.
The compound annual growth rates (CAGR) of net sales and net profits for the past three years were calculated to arrive at the respective numbers for revenue growth and net income growth. Finally, profitability was calculated by taking a simple average of net profit margins and operating profit margins.
Further, the returns parameter was calculated as an average of the return on capital employed (ROCE) and the return on equity (ROE)1, both available in the balance sheet of a company, for the past three financial years (2006-07, 2007-08 and 2008-09).
‘Inc.’ made two adjustments—the first involved converting all parameters to a scale of 0 to 100 for comparison purposes using the following equation.
The conversion equation assumes an inverted bell-shaped probability distribution for all parameters. The converted number then represents the ith company’s score on the parameter j (j running from 1 to 4, i.e. size, revenue growth, net income growth, profitability, and returns).
These scores were then ranked to assess the company’s performance on each parameter. The second adjustment normalized revenue and net income growth rates to address anomalies. Finally, all companies were ranked on the basis of scores assigned for each parameter. The model gave higher weights to calendar year data and lower to financial year data. The top 500 companies from the universe were selected as the ‘Inc.’ India 500.
Note 1: All parameters were annualized for comparison purposes; data sources were Capitaline, companies’ annual reports and online registration.
Note 2: This automatically penalises older data (data as on April 2009) by placing higher weights on the more recent data (i.e. data as on December 2009)
This content is provided by Inc. India magazine, a 9.9 Media publication