How the Fortune Future 50 identifies companies with long-term growth potential
As good as things may appear on the surface—stock indexes near highs, historically low unemployment in the U.S.—there is no getting around the fact that business conditions have become more challenging this year. Macroeconomic indicators are weakening, and policy uncertainty is at a historical high. Venture and IPO funding show signs of potentially drying up. And the tech sector is facing regulatory scrutiny and declining public trust.
In this environment, businesses may be tempted to focus on short-term survival and performance. Indeed, companies that are not generating sufficient cash flow today would be especially threatened by a downturn. However, there is still both an opportunity and a need for companies to also focus on the future: Our research at the BCG Henderson Institute has shown that even in economic downturns, revenue growth (not cutting costs) is the primary driver of total shareholder returns. Further, even the best-performing companies are increasingly likely to regress to the mean in sales growth given today’s business climate—so they need to continually renew their advantage if they wish to outperform.
In other words, it is more important than ever for companies to have vitality—the capacity to reinvent their businesses and sustain long-term growth.
A forward-looking index
Most business metrics indicate only what happened in the past. That used to be sufficient. In an earlier era, it was possible for executives to make reasonable decisions about future strategy based on backward-looking indicators. That is no longer true given the pace of technology-driven change. To help managers look forward, two years ago BCG and Fortune created the “Future 50,” an index that calculates the long-term growth prospects of major public companies and identifies the ones coming out on top.
The Future 50 index is based on two pillars: a “top-down” market implied view of a company’s potential and a “bottom-up” assessment of its capacity to deliver growth. We analyze this capacity across four dimensions (strategy, technology and investments, people, and structure), within which we quantify and test many theories from academic literature and business practice of what drives long-term performance.
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Our analysis leverages a wide range of financial and nonfinancial data sources. For example, we gauge the quality of a company’s patent portfolio as a measure of technology advantage. And we use natural language processing algorithms to parse companies’ annual reports and SEC filings to assess their strategic thinking on several dimensions, such as long-term focus and serving a broader purpose beyond financial returns. Finally, we use machine learning to choose and weight these factors according to their impact on long-term revenue growth.
The resulting index is intended to measure long-term vitality, which may not necessarily be reflected in short-term performance. Nevertheless the Future 50’s track record is encouraging so far: While not every company outperformed, each of our first two lists in aggregate significantly outperformed the broader market. The 50 companies we identified last year, for instance, have produced a cumulative shareholder return of 13.9% vs. 7.6% for the MSCI World stock index.
The importance of a path to profitability
Another consideration of this year’s ranking is that while long-term growth potential is important, businesses must have a path to profitability in order to exercise it—especially as conditions weaken and investors become more skeptical. It is impossible to predict for sure whether companies will overcome this challenge, but this year we have added a screen to filter out those with especially high risk: companies with negative operating cash flow.
We have once again stratified our ranking to account for other types of elevated risk, such as dependence on individuals or sensitivity to shifts in government policy. All high-growth companies have some inherent risk, of course, especially with rising macro uncertainty. But we have classified three companies—Tesla, Facebook, and property developer Sunac China—in a “higher uncertainty zone”; though they score well on our vitality analysis, each faces specific circumstances that threaten to potentially change its trajectory.
A clear opportunity
We found strong evidence that diversity is one of the factors that predict future growth—underlining the idea that diversity is a business imperative as well as an ethical one. Future 50 companies have notably more gender-diverse executive teams: According to BCG Henderson Institute analysis, 24% of executives at the Future 50 companies are women, compared with 18% at other large companies. Furthermore, nine of the 50 companies that made this year’s list have at least 40% female executives (including Alexion Pharmaceuticals at 56%), a level matched by only 4% of large companies more broadly.
One glaring pattern emerging from our analysis is the paucity of gender diversity at the very top of the corporate world—only 3% of all large global companies are led by women.
Three of this year’s Future 50 companies (Ctrip, Accenture, and CDW) have a woman CEO, while a fourth (Longfor Group Holdings) is led by its female chairperson and cofounder, and a fifth (Wuliangye Yibin) doesn’t have a CEO at all but has a woman in its top executive job, as president.
There is an obvious opportunity for future-oriented companies to boost their vitality by further increasing their gender balance—especially in the corner office.
Global patterns of corporate vitality
Nearly half of this year’s list is new, but once again more than 80% of companies are based in the U.S. or Greater China. This duopoly is in line with recent trends: 86% of the fastest-growing large companies over the past five years have come from these two regions. However, the balance has shifted: Whereas an equal number of U.S. and Chinese companies graced last year’s list, this year’s has 28 from the U.S. and 16 from China, perhaps a reflection of growing concerns among analysts about the strength of the Chinese economy.
More than half of our Future 50 is in the technology or communications sector. As regulatory scrutiny and cash flow concerns mount, some tech players may be derailed. But in aggregate, our index indicates that tech potency will continue to be a major growth driver. At the same time, industry is hardly destiny: Sector alone explains only 10% of performance, and the top 50 represent industries as diverse as real estate, transportation, and retail.
In other words, no matter what market they play in, all companies have the opportunity to maintain or restore vitality. We believe forward-looking measurements, such as this index, can help them do so.
Martin Reeves is a senior partner at management consulting firm BCG and chairman of the BCG Henderson Institute.
A version of this article appears in the November 2019 issue of Fortune with the headline “The Secret to Staying ‘Vital.’”
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