As companies across the world deal with a turbulent few years, it pays to look at what sets the best performing companies apart. There are only a handful of firms in the U.S. and Europe that have managed to grow steadily across multiple economic cycles as well as consistently hitting annual earnings goals, and so keeping investors happy.
In fact, out of the 1,350 companies that form the Fortune 1000 and S&P Euro 350, just 60 companies — 4.4% — demonstrated this kind of “efficient growth” for the past 20 years. Efficient growth, in this analysis, is defined as the ability to excel relative to industry peers in two categories. First, the ability to simultaneously demonstrate improvement in revenue and margin each year and, second, to outpace the growth of one’s industry over a 20-year interval (this post has more detail).
Five Surprises
These companies are not just managing costs more effectively than their peers and competitors but instead making better investment decisions. And they don’t necessarily go about it in the most obvious way either. As the CEB research team worked their way through the U.S. portion of these firms, there were five standout hypotheses that turned out to be wrong.
Hypothesis #1: Efficient-growth companies have a lower level of year-to-year cash flow volatility because they grow earnings consistently across a 20-year period.
Reality: Efficient-growth leaders experienced greater operating cash flow volatility over two decades, an indicator that they make chunkier investments with varying maturities and payback periods.
-
Chart 1: Average coefficient of variance in operating cash flow¹ From 1994-2015; n=84 (42 US efficient growth leaders, 42 US control group companies) Source: Compustat; CEB analysis
1 – Coefficient of variance is a standardized measure of dispersion, and is calculated as the ratio of the standard deviation to the mean.
Hypothesis #2: Efficient-growth companies in the US are willing to take on greater risk by entering more international markets than peers.
Reality: These enterprises actually had less exposure to the international market than our control group.
- Chart 2: Foreign market exposure Percentage of revenue derived outside of domestic market; n=84 (42 US efficient growth leaders, 42 US control group companies) Source: CEB analysis
Hypothesis #3: Efficient-growth companies engage in more partnerships with other companies to boost asset efficiency and share risks.
Reality: These organizations actually participate in fewer joint ventures and strategic partnerships.
- Chart 3: Number of joint ventures and strategic partnerships Total for period 1994-2014; n=84 (42 US efficient growth leaders, 42 US control group companies) Source: Factiva; CEB analysis
Hypothesis #4: Efficient-growth companies purchase more minority and majority stakes to leverage assets and capabilities.
Reality: These leading firms actually invest in far fewer minority and majority stakes.
- Chart 4: Number of minority and majority stakes held in other companies Total for period 1994-2016; n=84 (42 US efficient growth leaders, 42 US control group companies) Source: Factiva; CEB analysis
Hypothesis #5: Efficient-growth companies take on more debt because their credit rating allows for a lower cost of capital.
Reality: They actually take on less debt than their peers relative to equity.
- Chart 5: Average debt leverage n=84 (42 US efficient growth leaders, 42 US control group companies) Source: Compustat; CEB analysis
Casey Kobilka is an analyst at CEB, a best practice insight and technology company. Read more CEB blogs here.
