“Achieving the best ROSF, Sunstate Cement has been named Australias Best Performing Enterprise, followed by Diamond Gas Resources, Pandora, Colliers International, and Colgate-Palmolive“
Opinion Piece by Phil Ruthven, Founder, the Ruthven Institute
Sydney, 13 August 2020: Established to provide business leaders with the information and guidance they need to achieve the worlds best practice profitability, the Ruthven Institute encourages a holistic approach to business strategy and planning according to the 12 Golden Rules, which consist of founder Phil Ruthvens recommended guidelines for achieving a return on shareholder funds (ROSF) of over 22%.
Today, the Institute has released the results from its annual survey of the nation’s 2000 largest enterprises. Topping the list as the Best Performing Enterprise of 2019 is Sunstate Cement, which achieved a ROSF of 110%. Below, Mr. Ruthven provides the full list of the 100 Best Performing Enterprises for 2019 and shares a snapshot of how they achieved their success.
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The Ruthven Institutes profitability survey of Australias 2000 Largest Enterprises, accounting for nearly half (47%) of the nation’s revenue in 2019, has shown some outstanding success stories. Over the three-year period to 2019, nearly 13%“ or one in eight“ of the nation’s largest corporations achieved Worlds Best Practice profitability (WBP) of 22%+ return on shareholder funds (ROSF) after tax.
The nation’s total of 2.4 million operating enterprises generated a net profit of $232 billion, equating to a 4.4% return on $5.3 trillion in invested equity (including general government activities). While still a low return, it is an average of winning, plodding, and losing enterprises, including private, foreign, listed, and government enterprises. However, that 4.4% ROSF is the highest the Institute has observed in over 30 years, due mainly to record-low interest rates and lower depreciation of assets. It was reflected in part by the All Ordinaries Index nudging a record high of 7300 in February 2020.
Unfortunately, that is as good as it will get for a few years. In March 2020, the share market plunged more than 30% in response to the onset of COVID-19, before recovering some of that ground. Further, some listed stocks are not paying dividends to preserve liquidity; the unemployment rate is arguably into double digits, depending on how job-keepers are defined; and average GDP growth over the period to 2025 may be as low as 1.1% p.a., including a recession in 2020 that may extend into 2021.
Australias Invested Equity and Profitability
Private sector non-financial corporations clearly hold the largest share of equity, but government equity, in the form of general government and government business enterprises (GBEs), is bigger than we tend to think.
Due to the record deficits by the general government to manage the COVID-19 pandemic, Australias all-enterprises ROSF (including general government) could turn negative by F2021, as was the case in 1991. Once more, as in 1992, the nation’s all-enterprises ROSF may fall below the 10-year Government Bond Rate for at least one year, as suggested in the chart below.
However, despite general government enterprises being negative for some years, the other three of the four sectors of the economy“ GBEs, private sector corporations, and financial corporations“ will all stay positive.
Sectoral Performance in 2019
Returning to our annual survey of the nation’s largest enterprises, the below chart shows how polarised the various corporate cohorts are. The nation’s 100 Best Enterprises top the list, of course, with a stunning weighted average ROSF of 44% over the three-year period to 2019. Even the hundredth-best company on the list achieved 31% ROSF. Not all of the 100 Best Enterprises are Australian-owned, but we can also see that the 100 Best Australian-owned Enterprises averaged a very impressive 32% ROSF.
The nation’s 2000 Largest Enterprises, accounting for 47% of all revenue, averaged a ROSF of 9%. Some 14% of them achieved or surpassed the WBP ROSF average of 22%, demonstrating that this benchmark is indeed doable. Later, we will see that such profitability is possible in the vast majority of Australias 19 industry divisions and their 509 industry classes.
It is concerning, however, that 43% of our largest businesses did not average the historical 10-year Bond Rate (5.5% over the past 30 years) or ran at loss. Further, two-thirds did not average even half the WBP level of profitability.
Another benchmark test is to compare the Dow Jones Industrial Average (the top 30 listed companies on the New York Stock Exchange) with Australias 30 largest listed companies (on the Australian Stock Exchange), as we see below.
Over three decades, the United States’ largest 30 listed companies averaged 21%. By comparison, Australias largest 30 listed companies averaged 14%, or just two-thirds the ROSF of our cross-Pacific cousins. The picture is starker if we compare the 100 Largest Listed Enterprises in both countries, as shown below, where the US average is almost double our ROSF.
Some underperforming CEOs and Boards argue that the United States has an advantage in terms of its size and scale, its greater number of high-tech companies, and its lower taxes. These are excuses, of course; and spurious ones at that. In reality, the United States set the new higher limit on WBP profitability decades ago when they focused more on IP assets than tangible (hard) assets.
Of course, offloading hard assets alone does not automatically convert a bottom line to WBP profitability: it is just the start of modern business strategy. Examining Australias 100 Best Enterprises provides further insights into what makes a successful business, be it in the United States, Australia, or anywhere.
Australias 100 Best Enterprises
It surprises many boards that 21 enterprises could achieve a ROSF of over 50% in one year, let alone that average over three years. But they did, and luck had nothing to do with it. The rest of Australias 100 Best Enterprises“ all 79 of them“ had an average ROSF of over 30%. Collectively, the 100 Best Enterprises averaged 44% ROSF.
Sunstate Cement was the top performer for 2019; while the hundredth-best, still with a ROSF over 30%, tired retailer Michelin Australia. But when we look at the distribution of the 100 Best Enterprises across 17 of the nations 19 industry divisions, as shown in the chart below, it becomes clear that there is no such thing as a bad industry; nor a lucky one, for that matter.
All but two of the 100 Best Enterprises operated in just one industry class. Most were foreign-owned and were, therefore, more likely to be operating according to WBP strategy and the golden rules of success. However, the 37 locally-owned companies on the list matched the ROSF of their foreign counterparts). The table below highlights these, and other, features.
This Surveys Winners
The 100 Best Enterprises in terms of their average ROSF over three years are listed below.