When analyzing the quality of companies, investors often focus on financial metrics such as earnings growth or the strength of the balance sheet. And while financial metrics are certainly an integral part of any investment analysis, investors can benefit by looking at nontraditional statistics to find high-quality businesses.
Two areas that are often indicators of an excellent company are employee and customer satisfaction. Great businesses aim to maximize value for all stakeholders, not just the shareholders.
Two metrics investors can use to measure customer and employee loyalty are net promoter scores and Glassdoor ratings.
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Net promoter scores
The net promoter score (NPS) is a measurement of how likely a brand's customers are to promote it to others. It's produced by conducting a simple survey asking how likely a customer is to recommend the product or service to a friend. Not every company will take the time to conduct these surveys, but those serious about their brand image will hire outside marketing firms to survey their customers on an annual or semi-annual basis.
The NPS is derived by subtracting the percentage of detractors (not likely to recommend the product) from the percentage of promoters (very likely to recommend). The resulting score ranges from negative 100 to 100.
A negative score is a big red flag as that means the majority of customers would not recommend the product, while a score of greater than 60 is generally considered the mark of a highly regarded brand.
Marketing firm Invesp estimates 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 customers love a company's products, but it also means the business likely needs to spend less on marketing to drive sales.
To find a company's NPS, you'll have to do some digging. The company's investor relations page is a good place to start as businesses with high scores will often share them in presentations or shareholder letters.
There are also companies like Comparably, which conducts its own independent NPS surveys on hundreds of major brands.
Footwear apparel company Allbirds (BIRD 4.30%) shared its impressive net promoter score of 86 in its most recent investor presentation. The customer loyalty for this brand is best in class, which is why the company reports over 50% of its revenue comes from repeat customers.
The strength of a company's brand can be difficult to measure by simply looking at financials. But fortunately, net promoter scores offer investors an alternative metric to gauge customer sentiment.
Glassdoor ratings
Employee happiness is another great indicator of a strong business.
Glassdoor provides incredibly valuable insights 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 exclusively looking at financial statements during their research. Many of the top companies in the world such as Alphabet (GOOG 1.33%) and Amazon (AMZN +0.53%) have remained industry leaders for years because of their ability to attract top talent to their employee ranks.
In 2021, Gartner (IT +1.84%) found that 48% of companies in a survey had serious concerns about mass turnover. Employee turnover is not only extremely costly, it can also be highly disruptive to the company's execution.
Thus, positive Glassdoor reviews and ratings can give investors confidence that a business is both attracting and, more importantly, retaining top talent.
Zoom Video Communications (ZM +0.35%) is a perfect example of a business with incredibly high Glassdoor metrics. Eighty-eight percent of employees say they would recommend the company to a friend, and a staggering 94% of employees approve of CEO Eric Yuan.
While the company's stock has taken a beating due to the recent risk-off sentiment in the market, the Glassdoor reviews show a strong company beloved by its employees.
Outside-the-box thinking
Long-term investors can give themselves an edge by thinking outside the box when conducting their research. Net promoter scores and Glassdoor reviews are two ways you can gain unique insights into the strength of a business in pursuit of market-beating returns. Just remember, as with traditional metrics like those found on the balance sheet or income statement, it's important to consider the whole picture of a business and not make investment decisions based on a single attribute or number.
