World Class Benchmarking measures the financial performance of a company through Profitable Growth. Our database includes about 27,000 companies worldwide and each company is benchmarked versus all its global sector peers. Learn more about it in this post, and why Profitable Growth is what matters to you as an investor. Learn more at: http://becomeabetterinvestor.net/blog/profitable-growth-is-what-matters/

1. Profitable
Growth
is what
matters
Presented by: Andrew Stotz, CFA

2. 215 June 2016
'11 '12 '13 '14 PTM
5 4 5 4 2
'11 '12 '13 '14 PTM '11 '12 '13 '14 PTM
4 4 4 4 2 6 5 8 4 2
'11 '12 '13 '14 PTM '11 '12 '13 '14 PTM '11 '12 '13 '14 PTM '11 '12 '13 '14 PTM
2 2 3 5 4 6 6 5 4 4 9 7 10 10 4 4 4 4 2 2
Benchmarked against 1,130 Info Tech companies worldwide.
Profitable Growth
Asset utilization Profit margin Sales growth Margin change
Profitability Growth
Source: A. Stotz Investment Research
Notes: 1 = top ranking and 10 = worst. *Past 12 months of published data.
This is what you need to know about financial performance

3. 315 June 2016
Global universe of about 27,000 companies in 10 sectors
Rank the company on Profitable Growth from 1 (best) to
10 (worst), against all sector peers of similar size
Share price performance of superior Profitable Growth
companies has beaten peers
Companies with large improvements in Profitable
Growth rank yielded outstanding share price returns
The bottom of the triangle shows the strengths and
weaknesses of the company and builds up to the
Profitable Growth ranking
Source: A. Stotz Investment Research
Executive summary

4. 415 June 2016
Profitable Growth is what matters
Why Profitable Growth matters
Classifying peer group
How to read the Triangle

5. 515 June 2016
Why Profitable Growth matters
Superior Profitable Growth companies beat
their peers
Companies with large improvements in
Profitable Growth rank yield outstanding
returns
Here is an academic-style study we did

6. 615 June 2016
We started this study with 93,500 companies that were
listed at any point in time, anywhere in the world from
March 1995 to March 2015
This left us with about 19,500 stocks listed on different markets across
the world
19,500 companies across the world
We removed 4,000 stocks that did not have the fundamental data
needed to calculate A. Stotz Profitable Growth metrics
We then removed financial companies and companies with
a market capitalization of less than US$50m which left us
with 23,500 nonfinancial companies worldwide

7. 715 June 2016
Methodology
We grouped all companies by size within the 10 different sectors:
Large: Companies with either assets or sales of more than US$700m
Small: Companies with either assets or sales of less than or equal to US$130m
Medium: Companies that are not large or small
If the sales and assets for a company showed conflicting results we let the size of the
sales determine the group
A company that had sales of a large company, but assets of a medium one we classified
as large and a company with medium sales and large assets we classified as medium
The remaining one percent of all companies, either had large sales and small assets or
small sales and large assets, were classified as medium companies

8. 815 June 2016
Methodology (cont.)
First we calculated the two components of our A. Stotz Profitable Growth measure:
We ranked the companies in deciles on our combined Profitable Growth score relative
to all their sector peers of similar size across the world in each year from 1995 to 2015
𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
(𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠)/2
𝐺𝑟𝑜𝑤𝑡ℎ =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟′ 𝑠 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝐸𝑃𝑆 − 𝑃𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟′ 𝑠 𝐸𝑃𝑆
𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟′ 𝑠 𝐸𝑃𝑆

9. 915 June 2016
Methodology (cont.)
We calculated the one-year stock price return from the prior year’s reporting date, for
example for Dec 2013 results, if we assume that the company announced its financial
results by Mar 2014 then its one-year price return was from Mar 2013-Mar 2014
Then we calculated the simple average price return for each Profitable Growth decile
and the compound annual price return during Mar 1995-Mar 2015
To eliminate outliers, we excluded 1% of the observations, which meant stocks that had
a price change of more than 500% or less than -85% in any one year
We repeated this process for each size group; large, medium and small and look at the
results separately

10. 1015 June 2016
Methodology (cont.)
The final number of companies included in each size group after excluding all
companies that didn’t have year-end in December and adjusting for outliers:
Large: 3,600 companies
Medium: 4,400 companies
Small: 4,000 companies
Total: 12,000 companies

11. 1115 June 2016
The higher deciles
yielded higher returns
versus the lower
deciles
Over the time period
studied, even the worst
decile showed an
average annual return
that was positive
But the decile with
the best Profitable
Growth returned 15x
higher annual return
than the worst
Large: Superior Profitable Growth companies beat their
peers
Sources: A. Stotz Investment Research, Thomson Reuters
31
24
21
18
17 16
12
10
6
2
16
-
5
10
15
20
25
30
35
Best 2 3 4 5 6 7 8 9 Worst
Simple average
Average of all groups
Price return from Mar 1995 - Mar 2015 (%, p.a.)

12. 1215 June 2016
The higher ranked
deciles yielded higher
returns
For medium sized
companies the
difference between
best and worst were
even more significant
than for large
The two worst
deciles showed a
negative average
annual return
Medium: Superior Profitable Growth companies beat their
peers
Sources: A. Stotz Investment Research, Thomson Reuters
34
26
19
15
12
8
5
2
(1)
(7)
12
(10)
(5)
-
5
10
15
20
25
30
35
40
Best 2 3 4 5 6 7 8 9 Worst
Simple average
Average of all groups
Price return from Mar 1995 - Mar 2015 (%, p.a.)

13. 1315 June 2016
Again, the higher
ranked deciles yielded
higher returns
The Profitable
Growth rank shows a
clear relationship with
share price
A high rank means a
high share price, i.e. a
higher Profitable
Growth rank means a
higher value of the
business
This holds true for
large, medium and
small companies
Small: Superior Profitable Growth companies beat their
peers
Sources: A. Stotz Investment Research, Thomson Reuters
33
22
18
14
9
5 4
2
(5)
(12)
9
(15)
(10)
(5)
-
5
10
15
20
25
30
35
40
Best 2 3 4 5 6 7 8 9 Worst
Simple average
Average of all groups
Price return from Mar 1995 - Mar 2015 (%, p.a.)

14. 1415 June 2016
Methodology part 2
We analyzed the share price performance of the companies that changed their
Profitable Growth rankings in each size group
We calculated the change in decile ranking from the prior year in each group, for
example, if the company was ranked in the 3rd decile this year versus the 4th decile last
year, the company improved by one step
Then we grouped the companies that showed no change in decile rank as the starting
point. After that we grouped every company that showed an incremental one, two or
three step improvement into another group. From this we ended up with seven
groups, each containing a different number of companies
Then we calculated the simple average price change of each group each year, assuming
that we started to invest in each group every year in March, from Mar 1995-Mar 2015
and compounded the annual returns of each group

15. 1515 June 2016
The Profitable
Growth group that
improved by 7-9 steps,
returned 33% p.a.,
more than a double
return compared to the
group that showed no
improvement
The Profitable
Growth group that fell
7-9 steps in decile rank
displayed a slightly
negative price
performance
Large: Companies with large improvements in Profitable
Growth rank yield outstanding returns
Sources: A. Stotz Investment Research, Thomson Reuters
33
28
23
16
8
3
(0)
(5)
-
5
10
15
20
25
30
35
+7-9 +4-6 +1-3 Same -1-3 -4-6 -7-9
Simple average
Price return from Mar 1996 - Mar 2015 (%, p.a.)

16. 1615 June 2016
It looks similar for
medium sized
companies as for large
The Profitable
Growth groups that
improved by 4-9 steps,
returned 31%
The Profitable
Growth groups that fell
4-9 steps in decile rank
displayed a negative
price performance,
losing on average 4-5%
The market is less
discerning, strong
improvement means
almost equally strong
share price
performance
Medium: Companies with large improvements in Profitable
Growth rank yield outstanding returns
Sources: A. Stotz Investment Research, Thomson Reuters
31 31
21
13
4
(5) (4)
(10)
(5)
-
5
10
15
20
25
30
35
+7-9 +4-6 +1-3 Same -1-3 -4-6 -7-9
Simple average
Price return from Mar 1996 - Mar 2015 (%, p.a.)

17. 1715 June 2016
For small companies
the group that
improved 4-6 steps
returned more than
the group that improve
7-9 steps
It seemed like the
market was more
skeptical to extreme
improvements for
small companies
The market rewards
improvements in
Profitable Growth and
this holds true for
large, medium and
small companies
Small: Companies with large improvements in Profitable
Growth rank yield outstanding returns
Sources: A. Stotz Investment Research, Thomson Reuters
24
27
17
11
3
(3)
(10)
(15)
(10)
(5)
-
5
10
15
20
25
30
+7-9 +4-6 +1-3 Same -1-3 -4-6 -7-9
Simple average
Price return from Mar 1996 - Mar 2015 (%, p.a.)

18. 1815 June 2016
Results from our research looking at 12,000 companies across the
world
Share price performance of superior Profitable Growth companies
beat their peers
Companies with large improvements in Profitable Growth rank
yield outstanding share price returns
This holds true for large, medium and small companies
Source: A. Stotz Investment Research
What you have learned about why Profitable Growth matters

19. 1915 June 2016
Classifying the peer group
What is the size of the business?
What sector does the company operate in?

20. 2015 June 2016
• Size does matter
• Because small companies tend to grow faster than large
• First we group the company into one of the following three
size categories:
• Small, medium or large
What is the size of the business?

21. 2115 June 2016
• Large firms
• Either asset or revenue more than US$700m
• Small firms
• Either asset or revenue less than US$130m
• Medium firms
• Either assets or revenue between large and small
Large, medium or small?

22. 2215 June 2016
• No two companies are alike, but some are more alike
than others
• We use The Global Industry Classification Standard
(GICS®) developed by MSCI & Standard & Poor's
• Currently there are 10 Sectors and 24 Industry Groups
• We rank the company within one of the ten major
sectors
There are ten major sectors in the world

23. 2315 June 2016
1. Consumer discretionary (Cons. Disc.) – Ford
2. Consumer Staples (Cons. Staples) – Wal-Mart
3. Energy – Exxon Mobil
4. Health Care – Johnson & Johnson
5. Industrials – General Electric
6. Information Technology (Info. Tech.) – Google
7. Materials – Monsanto
8. Real Estate – Simon Property Group
9. Telecom – AT&T
10.Utilities – Duke Energy
What sector does the company operate in?

24. 2415 June 2016
• We first classify the business based on it size (Small,
medium, large)
• A large company should not be compared against a small
company and vice versa
• We then classify the company into a Global sector
• A consumer company should not be compared against an
energy company
• The company is then assigned a 1 (best) to 10 (worst)
ranking within its size category of its sector
What you have learned about classifying the peer group

25. 2515 June 2016
How to read the Triangle
The top of the triangle is what matters
The results at the top of the triangle are
explained by the results below
Level two and three explain what is driving
Profitable Growth

26. 2615 June 2016
Source: A. Stotz Investment Research
The top of the triangle is what matters: Profitable Growth

27. 2715 June 2016
Source: A. Stotz Investment Research
Notes: 1 = top ranking and 10 = worst. PTM = Past 12 months of published data.
We rank the company from 1 (best) to 10 (worst)
Best
'11 '12 '13 '14 PTM
1 1
2 1 2 1
3 2 3 2
4 3 4 3 1
5 4 5 4 2
6 5 6 5 3
7 6 7 6 4
8 7 8 7 5
9 8 9 8 6
10 9 10 9 7
10 10 8
9
10
Profitable Growth
Worst
Subject company
The company is
grouped into deciles
based on financial
performance

28. 2815 June 2016
Source: A. Stotz Investment Research
Notes: 1 = top ranking and 10 = worst. PTM = Past 12 months of published data.
We track the company for 5 periods, updated quarterly
Five periods of ranking
In the past 12
months the
company’s decile
ranking among its
peers improved to
No. 2 from No. 4
Company was ranked
in the 4th decile in 2014
Best
'11 '12 '13 '14 PTM
1 1
2 1 2 1
3 2 3 2
4 3 4 3 1
5 4 5 4 2
6 5 6 5 3
7 6 7 6 4
8 7 8 7 5
9 8 9 8 6
10 9 10 9 7
10 10 8
9
10
Profitable Growth
Worst
Subject company

29. 2915 June 2016
'11 '12 '13 '14 PTM
5 4 5 4 2
'11 '12 '13 '14 PTM '11 '12 '13 '14 PTM
4 4 4 4 2 6 5 8 4 2
'11 '12 '13 '14 PTM '11 '12 '13 '14 PTM '11 '12 '13 '14 PTM '11 '12 '13 '14 PTM
2 2 3 5 4 6 6 5 4 4 9 7 10 10 4 4 4 4 2 2
Benchmarked against 1,130 Info Tech companies worldwide.
Profitable Growth
Asset utilization Profit margin Sales growth Margin change
Profitability Growth
Source: A. Stotz Investment Research
Notes: 1 = top ranking and 10 = worst. *Past 12 months of published data.
We put the company’s 1 to 10 rank into the triangle
'11 '12 '13 '14 PTM
1 1
2 1 2 1
3 2 3 2
4 3 4 3 1
5 4 5 4 2
6 5 6 5 3
7 6 7 6 4
8 7 8 7 5
9 8 9 8 6
10 9 10 9 7
10 10 8
9
10
Profitable Growth

30. 3015 June 2016
Source: A. Stotz Investment Research
Profitable Growth comes from a combination of the
company’s score on profitability and growth
Profitable growth
is explained by
the two measures
below it

31. 3115 June 2016
Source: A. Stotz Investment Research
Strong profit growth with minimum asset use is great
 This Profitable Growth
drives truly sustainable
long-run value in the
business
 Reduced asset driven
earnings growth is great,
because this decreases the
need for new capital
injections

32. 3215 June 2016
Source: A. Stotz Investment Research
Let’s review the first driver of Profitable Growth: Profitability

33. 3315 June 2016
Source: A. Stotz Investment Research
Profitability – Strong profitability means generating more
profit from assets in place
 Profit divided by assets =
Return on Assets
 Getting more out of
assets means the company
needs less capital
 BEWARE: Very high
profitability, with no
growth, is not sustainable

34. 3415 June 2016
Source: A. Stotz Investment Research
Let’s review the second driver of Profitable Growth:
EPS growth

35. 3515 June 2016
Source: A. Stotz Investment Research
Growth – Earnings per share growth, the market values it
and so should you
 Annual percent change
in profit per share
 This shows that
customers want the
company’s product and
that it can be produced
profitably
 BEWARE: High growth,
but low profitability is
often waste of money

36. 3615 June 2016
'11 '12 '13 '14 PTM
5 4 5 4 2
'11 '12 '13 '14 PTM '11 '12 '13 '14 PTM
4 4 4 4 2 6 5 8 4 2
'11 '12 '13 '14 PTM '11 '12 '13 '14 PTM '11 '12 '13 '14 PTM '11 '12 '13 '14 PTM
2 2 3 5 4 6 6 5 4 4 9 7 10 10 4 4 4 4 2 2
Benchmarked against 1,130 Info Tech companies worldwide.
Profitable Growth
Asset utilization Profit margin Sales growth Margin change
Profitability Growth
Source: A. Stotz Investment Research
Notes: 1 = top ranking and 10 = worst. *Past 12 months of published data.
Level two explains what is driving Profitable Growth

37. 3715 June 2016
Source: A. Stotz Investment Research
The results at the top of the triangle are explained by the
results below
Each measure is
explained by the
two measures
below it

38. 3815 June 2016
Source: A. Stotz Investment Research
Let’s review the two measures that drive profitability

39. 3915 June 2016
Source: A. Stotz Investment Research
Asset utilization is the amount of revenue the company
generates from the assets in place
 Sales divided by assets
 Getting more revenue
from the assets is one way
to increase profitability
 Careful asset growth
preserves capital
 BEWARE: Too-tight asset
growth policy prevents
sales growth

40. 4015 June 2016
Source: A. Stotz Investment Research
Profit margin shows how good the company is at cost control
 Profit divided by sales
 A strong profit margin
shows that products that
customers want is
delivered profitably
 This is one measure of
the strength of the
management team
 BEWARE: Too-tight cost
control can constrict
growth

41. 4115 June 2016
Source: A. Stotz Investment Research
Let’s review the two measures that drive EPS growth

42. 4215 June 2016
Source: A. Stotz Investment Research
Sales growth proves that customers want the product
 Annual change in sales
 This is the part of EPS
growth that is externally
driven
 Essential to grow
the business, no sales
growth means no
customer demand
 BEWARE: Growth
without profit ends
painfully

43. 4315 June 2016
Source: A. Stotz Investment Research
Improving the profit margin is one of the fastest routes to
strong EPS growth
 Annual change in net
profit margin
 Margin improvement
comes from management
team’s focused effort
 It means the company is
getting more profit from
every sale
 BEWARE: Too high prices,
or low costs could hurt
sales growth

44. 4415 June 2016
'11 '12 '13 '14 PTM
5 4 5 4 2
'11 '12 '13 '14 PTM '11 '12 '13 '14 PTM
4 4 4 4 2 6 5 8 4 2
'11 '12 '13 '14 PTM '11 '12 '13 '14 PTM '11 '12 '13 '14 PTM '11 '12 '13 '14 PTM
2 2 3 5 4 6 6 5 4 4 9 7 10 10 4 4 4 4 2 2
Benchmarked against 1,130 Info Tech companies worldwide.
Profitable Growth
Asset utilization Profit margin Sales growth Margin change
Profitability Growth
Source: A. Stotz Investment Research
Notes: 1 = top ranking and 10 = worst. *Past 12 months of published data.
Level two and three explain what is driving Profitable Growth

45. 4515 June 2016
Results at the top of the triangle are explained by results below
The company is ranked against peers on six different measures,
four of them on the bottom of the triangle
1. Asset utilization is the revenue generated from assets in place
2. Profit margin shows how good the company is at cost control
3. Sales growth proves that customers want the product
4. A rising profit margin is an internal driver of EPS growth
Level two and three explain what is driving Profitable Growth
Source: A. Stotz Investment Research
What you have learned about how to read the Triangle

46. 4615 June 2016
Global universe of about 27,000 companies in 10 sectors
Rank the company on Profitable Growth from 1 (best) to
10 (worst), against all sector peers of similar size
Share price performance of superior Profitable Growth
companies beat their peers
Companies with large improvements in Profitable
Growth rank yield outstanding share price returns
The bottom of the triangle shows the strengths and
weaknesses of the company and builds up to the
Profitable Growth ranking
Source: A. Stotz Investment Research
What you have learned about World Class Benchmarking

47. 15 June 2016 47
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