The term Fortune 500 refers to an annual listing by Fortune magazine of the top 500 public companies in the U.S., as ranked by sales, assets, earnings, and capitalization. This list ranks only public companies, or those which have issued securities through an offering and which are traded on the stock market. This list is important to a number of financial groups, but particularly to investors, who study the performance of these select companies. In addition, academic and business researchers look to these companies to learn about best practices in various industries and to discover the secrets to their business and financial success.
Ranking Factors Used in Determining the Fortune 500
SALES GROWTH RANKING. Tracking the increase in sales of a company is a way to determine if the company is indeed growing. This is very important to investors. Sales growth is also indicative of the state of the economy. One would expect a company's sales to grow during a healthy period of economic activity. When a company's sales grow faster than the general economy in the markets in which the firm operates, the firm is obviously outperforming the market due to some process within the company. It could be due to a superior quality product, low-cost production or service delivery methods, excellent customer service and support, or product or process innovations. Companies on the Fortune 500 list typically exhibit more than one success measure that may be important for competitors to emulate.
ASSETS RANKING. Companies listed on the Fortune 500 may also have large and growing assets. As asset is any item of economic value owned by the corporation, including cash, securities, accounts receivable, inventory, office equipment, and property.
EARNINGS RANKING. A firm's earnings are calculated by subtracting the cost of sales, operating expenses, and taxes from its revenues. Earnings are often the single most important determinant of a corporation's stock price.
CAPITALIZATION RANKING. Capitalization is the sum of a corporation's long-term debt, stock, and retained earnings. It may also be called invested capital. By multiplying the number of shares outstanding by the price per share, it is possible to determine the market price of an entire company or its market capitalization.
Most and Least Admired Companies
Another popular feature of the Fortune 500 list is the top 10 rankings of the most and least admired companies. The top 10 list for 1999—which included such respected names as General Electric, Microsoft, Dell Computer, Cisco Systems, Wal-Mart Stores, Southwest Airlines, Berkshire Hathaway, Intel, Home Depot, and Lucent Technologies—posted average total returns of 49.4 percent that year and a return for the most recent five-year period of 63.4 percent. The one-year return is over double the S&P 500 average. The top ten "most admired" ranking is based on all the votes a company received from all respondents across all industries to the Fortune survey.
The bottom ten ranking is based on the scores received from only respondents within the company's industry to the Fortune survey. The most recent bottom ten included Humana, Revlon, Trans World Airlines, CKE Restaurants, CHS Electronics, Rite Aid, Trump Resort, Fruit of the Loom, Amerco, and Caremark Rx. This list had a 1999 total return of -51.4 percent and a five year total return of -12.6 percent.
According to the Fortune 500 study, the annual list of 500 companies represents the bedrock of American business and remains an important tool for both researchers and investors. The Fortune 500 list is well established and has been a standard of performance of over 46 years. In recent years, the companies of the Fortune 500—whether ranked by growth, return, or market capitalization—were led by computer firms and telecommunications companies. Fortune also compiles the Global 500 list, a list of the most admired international companies, and a list of top employers on an annual basis.
Further Reading:
Filbeck, Greg, Raymond Gorman, and Diana Preece. "Fortune's Most Admired Firms: An Investor's Perspective." Studies in Economics and Finance. Fall 1997.
Huey, John. "The Real 500." Fortune. April 27, 1998.
See also: Blue Chip
