Inner City 100 EKG: Beyond Growth
We know the Inner City 100 (IC 100) companies are growing rapidly, but does rapid growth translate into strong financial performance? Can these companies generate profits while sustaining rapid growth? Are they operating at maximum efficiency? The Initiative for a Competitive Inner City (ICIC) took a closer look at the financial statements of all companies named to the IC 100 list during the past five years to find answers to these questions. Using the Business EKG, an online tool developed by the Ewing Marion Kauffman Foundation, ICIC calculated several measures of company performance, including profitability, sales per employee, debt-to-equity ratio, return on equity, and return on assets. We then benchmarked those figures against industry averages using PricewaterhouseCoopers (PWC) AMMBIT (www.ammbit.com) tool. The results showed that the IC 100 winners perform better than most companies in their industries and are generally well positioned for the long term. With an average age of 13 years, a period that encompassed a serious recession, these companies have shown that their success is not ephemeral, and they have the experience to face the challenges of the current downturn.
Average Sales Growth
The IC 100 companies, which collectively average a 50-percent annual growth rate, compare favorably with the top quartile from the PWC data for average annual sales growth in each industry group. Among real estate, rental & leasing companies, the IC 100 averaged 87 percent annual growth, compared to a 17 percent average for the industry's top quartile. Similarly, in accommodation & food services, the IC 100 companies averaged more than double that of the top quartile for the industry. IC 100 companies even outpaced the fastest growing companies in the industry with the highest average growth: information (IT, telecom, etc.). IC 100 companies outpaced the top quartile nationally 74 percent to 45 percent.
The IC 100 companies as a group averaged 3.5 percent net income, so they're profitable while growing rapidly. In most industries, they were among the most profitable. In the accommodation & food services industries, for example, the average for the IC 100 -- 4 percent -- equaled that of the top quartile nationally. In the retail industry, the IC 100 averaged 6 percent, compared to 4.7 percent for the top quartile, according to PWC data. Only IC 100 information companies, which operated at a loss of 1.5 percent, lagged the industry average. But even there, the IC 100 companies outperformed the middle quartile nationally, which averaged a loss of 2.6 percent.
Sales per Employee
As a group, the IC 100 companies averaged close to $200,000 in sales per employee, which approximated the average of the middle quartile in their respective industries. In one exception, the IC 100 wholesale companies averaged close to $340,000 per employee, compared to an average of $256,482 for the industry's top quartile. On the other hand, IC 100 professional, scientific, and technical services companies averaged just $120,000 per employee compared to an average of $150,000 for the middle quartile of the PWC group.
Debt to Equity
IC 100 companies are generally highly leveraged, with an average debt-to-equity ratio of 3 to 1, which generally indicates vulnerability to industry downturns. In some cases, the debt-to-equity average for the IC 100 companies was much higher than the average for the highest quartile for the industry. In the wholesale industry, for example, the IC 100 companies averaged 5.4 to 1, while the top quartile averaged just 1.3 to 1. However, two industries, real estate and rental & leasing, are the least leveraged among the IC 100 companies, and here, comparisons are favorable. In those industries, the IC 100 averaged 1.2 to 1, compared to the middle quartile average of 1.44 to 1. In the retail industry, the IC 100 companies, at 0.38 to 1, are among the least leveraged, according to the PWC data set.
Return on Equity
As a group, the IC 100 has an impressive 23 percent return on equity, one of the most important measures of a company's viability. Broken down by industry sector, IC 100 companies in accommodation & food services, construction, manufacturing, professional, scientific & technical services, and retail trade would all be among the top quartile of companies in the PWC data. Only IC 100 companies in the wholesale industry showed a negative return -- 3.2 percent -- well below the average for the middle quartile of the PWC companies.
Return on Assets
The IC 100 companies have also shown an ability to produce profits on the total assets employed in their businesses, with an average ROA of 11 percent. Again, by industry, the IC 100 companies would be among the top quartile when compared with the PWC data. Professional, scientific & technical services companies from the IC 100 had a 19 percent return on assets compared to an average of 11.5 percent for the top quartile nationally.