Andrew Stotz – What It Takes to be Financially World Class

What It Takes to be Financially World ClassToday I want to talk to you about what it means to be Financially World Class.Many years ago, the management team of the business I co-own in Thailand, CoffeeWORKS, made it through the tenth year of an annual (and massive) quality audit done by one of our multinational customers. Our customer congratulated us for having World Class quality, the feeling among our management team and all employees was ecstatic. Since that time, we have maintained that World Class level of quality in CoffeeWORKS.Is CoffeeWORKS Financially World Class?As I drove home from the celebration at the factory, I asked myself, “How would we know if our company was Financially World Class?” I felt a bit disappointed with myself because I should have had the answer long ago. After all, as a financial analyst, I had already developed various tools to evaluate the stocks I was either recommending or owning.Developing a measurement to meet many requirementsSo at that time, I set out to develop a tool that could meet the following requirementsIt had to be ONE measure that definitively assessed whether a company was Financially World ClassIt had to be a measure that, if improved, could be shown to increase the value of the businessIt had to be able to stand up to rigorous scrutiny from finance academics and professionalsIt had to be clear whether a company was moving up or down in that rankingIt had to be able to be used by both sophisticated financial analysts as well as company managers who knew nothing about financeIt needed to be robust enough that we could use it in CoffeeWORKS for the assessment of management performanceIt needed to be a financial measure that would bring the management team together instead of pitting them against each otherIt needed to be able to be used for any company in the worldThe World Class Benchmarking scorecard was bornAbout seven years ago, I developed the World Class Benchmarking scorecard that met all of the above criteria, and I rolled it out to the CoffeeWORKS management team. Now, we update it every month, and at that time, we review the company’s financial performance. Though we are not Financially World Class every month, the whole management team now thoroughly understands when we are not, and as a result, they then make more informed decisions.The World Class Benchmarking scorecard is based on scienceIn creating the scorecard, we did a lot of academic-style testing of various measures. From that testing, we could calculate the percent increase in the company’s value from improving the ranking. This is why the scorecard is also so handy for picking stocks.So, besides using the scorecard to help management teams, we also use it daily in A. Stotz Investment Research to evaluate the financial performance of any company in the world. We regularly perform an internal assessment of many thousands of companies worldwide, and internally we designate some as World Class Companies.What is a World Class Company?What follows is our internal process of identifying World Class Companies. We start with a universe of 26,000 firms worldwide across ten sectors: Communication Services, Consumer Discretionary, Consumer Staples, Energy, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities.To determine a World Class Company, we focus on one measure, Profitable Growth. This is a composite of two measures that matter most regarding share-price performance: Profitability and growth relative to global sector peers.We consider the “World Class Company” status within each sector; in other words, there is no one World Class Company in the world; instead, there is only a World Class