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When analyzing the quality of companies, investors often focus on financial metrics such as earnings growth or balance sheet strength. And while financial metrics are certainly an integral part of any investment analysis, investors can benefit from looking at non-traditional statistics to find high-quality companies.
Two areas that are often indicators of a great business are employee and customer satisfaction. Great companies aim to maximize value for all stakeholders, not just shareholders.
Two metrics investors can use to gauge customer and employee loyalty are Net Promoter Scores and Glassdoor Ratings.
Net Promoter Scores
Net Promoter Score (NPS) is a measure of the likelihood that customers of a brand will promote it to others. It is produced by conducting a simple survey asking how likely a customer is to recommend the product or service to a friend. Not all companies will take the time to conduct these surveys, but those who are brand conscious will hire outside marketing firms to survey their customers on an annual or semi-annual basis.
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The NPS is obtained by subtracting the percentage of detractors (unlikely to recommend the product) from the percentage of promoters (very likely to recommend). The score obtained varies from minus 100 to 100.
A negative score is a big red flag because it means the majority of customers wouldn’t recommend the product, while a score above 60 is generally considered the hallmark of a highly valued brand.
Marketing firm Invesp estimates that word-of-mouth promotion accounts for $6 trillion in annual consumer spending and is five times more effective than paid marketing. So a high NPS score not only indicates that customers like a company’s products, but it also means that the company probably needs to spend less on marketing to drive sales.
To find a company’s NPS, you’ll have to dig. The company’s investor relations page is a good place to start as companies with high scores will often share them in presentations or letters to shareholders.
There are also companies like Comparably, which conduct their own independent NPS surveys of hundreds of top brands.
Footwear and clothing company all the birds (NASDAQ: BIRD) shared his impressive net promoter score of 86 in his latest investor presentation. Customer loyalty for this brand is best in class, which is why the company states that more than 50% of its revenue comes from repeat customers.
The strength of a company’s brand can be difficult to gauge by simply looking at financial data. But fortunately, net promoter scores offer investors an alternative metric for gauging customer sentiment.
Employee happiness is another great indicator of a strong business.
Glassdoor provides incredibly valuable insight into a company’s employee sentiment. You can read employee reviews, see how likely they are to recommend their employer to a friend, and even find the percentage of employees who approve of the CEO.
This is a wealth of data that many investors miss by looking exclusively at financial statements during their research. Many of the world’s largest companies such as Alphabet (NASDAQ:GOOG) and Amazon (NASDAQ: AMZN) have remained industry leaders for years due to their ability to attract top talent to their ranks of employees.
In 2021, Gartner (NYSE: IT) found that 48% of companies surveyed had serious concerns about mass turnover. Staff turnover is not only extremely costly, it can also be very disruptive to business execution.
So positive Glassdoor reviews and ratings can give investors confidence that a company is attracting and, more importantly, retaining top talent.
Focus on video communications (NASDAQ: ZM) is a perfect example of a company with incredibly high Glassdoor metrics. Eighty-eight percent of employees say they would recommend the company to a friend, and 94% of employees approve of CEO Eric Yuan.
While the company’s shares have been battered by recent risk sentiment in the market, Glassdoor’s reviews show a solid company valued by its employees.
Thinking outside the box
Long-term investors can give themselves an edge by thinking outside the box when researching. Net Promoter Scores and Glassdoor Reviews are two ways to get unique insights into a company’s strength in pursuit of above-market returns. Remember that, as with traditional measures like those found on the balance sheet or income statement, it is important to consider the overall picture of a business and not make investment decisions based on a single attribute or number.
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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Mark Blank holds positions in Zoom Video Communications. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon and Zoom Video Communications. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.