In search of success

Phil Ruthven examines the top performing companies in Australia and finds that really profitable companies are a rarity.

The 100 most profitable large companies in Australia over the past five years had an average return on shareholder funds after tax (ROSF) of a staggering 51 per cent; and they came from 15 of the nation’s 19 major industry divisions.

Only agriculture, utilities, health and personal, and other services missed a guernsey in the winning team.

It was a similar story for the five years prior to 2013 where the top 100 ROSF average over the five years ranged from 200 per cent per annum to 31 per cent.

The overwhelming majority – 98 companies – basically operated in one of the nation’s 509 classes of industry. Only two were conglomerates and not overly diversified at that.

Ownership was split 56/44 in favour of foreign-owned versus Australian-owned companies, pointing to the greater likelihood of foreign companies following world best practice and having a considerable advantage in intellectual property (IP) compared with most large Australian companies. But, not necessarily better than the other 44 Australian-owned companies in the top 100: both groups averaged a 51 per cent ROSF.

Private companies were the dominant type of company with 61 of the 100 firms having an ROSF of 52 per cent. Listed companies numbered 36 and averaged 49 per cent.  Government enterprises numbered just three, yet had an average ROSF of 73 per cent.

Location irrelevant

Locations of head offices didn’t seem to matter much, as all states were represented except the Northern Territory and Tasmania; and the differences in performance were not that great. 

That said, Australian Capital Territory companies averaged 58 per cent ROSF and South Australia was at the other end with 41 per cent compared with the top 100 average of 51 per cent.

This shows that consistently high-performing companies can perform no matter what industry they are in, or what type of enterprise they are, regardless of ownership. Any head-office location will do.

But the really profitable companies are rare. As the exhibit reveals, the average ROSF over the past five years for the large companies – 1,241 in the survey conducted by IBISWorld and accounting for nearly half the revenue from the nation’s two million businesses – was a disappointing 8.3 per cent.  Most shareholders would have done a lot better with their money in property, super, or on the stock market.

One in five (19 per cent) ran at a loss over the five years; 240 of the 1,241. Some 33 of the companies had a negative ROSF between 25 – 50 per cent; 15 in the negative range of 50 – 100 per cent; and two companies lost more than 100 per cent of their shareholder funds annually.

On the brighter side, 61 per cent of the companies had an average ROSF greater than the average 10-year bond rate over the five years of 4.2 per cent, which isn’t saying much.

World best practice profitability since the birth of the “new age” in the mid-1960s is between 20 – 25 per cent ROSF: double the best practice of the 11 – 12 per cent range in the “industrial age” from the mid-1860s to the mid-1960s. Just one in six (17 per cent) of the 1,241 large companies in this analysis achieved an ROSF of 20 per cent or over. 

Six had an average ROSF of over 100 per cent per annum and these stars weren’t necessarily thinly-capitalised businesses, as IBISWorld had eliminated from the analysis any company with a ratio of equity to total assets of less than five per cent.

Seeking answers

Why do we have so few high-flyers? What are the secrets to success that so many companies don’t know or ignore? There are a dozen golden rules.

• Stick to one business at a time, do not diversify; expand overseas if growth is needed.
• Aim to dominate a segment or segments of one’s industry or market.
• Be forever innovative, valuing and building on the business’ IP.
• Outsource non-core activities to enable growth.
• Don’t own “hard” assets (land, buildings, equipment).
• Have good and professional financial management.
• Plan from the outside-in not the inside-out.
• Anticipate any new industry life-cycle changes.
• Follow world best practice for one’s own industry and type of business.                                         
• Develop strategic alliances.
• Develop a unique and people-oriented organisational culture.
• Value leadership first and management second.

If a CEO and board can tick off these or most of them, they too can join the nation’s best 100 businesses, if they aren’t already in this exalted list.