Understanding the Quality score

Quality for utility companies

What makes a strong business?

A good business needs more than a good year. The Quality score looks at how well the company uses its money, earns profit and supports its finances.

This guide covers businesses supplying services such as electricity and water. Their networks require large investments.

5 parts. One score from 0 to 100.
The score describes the business. It does not tell you whether the shares are cheap.

Using money well 13%Cash behind owner payments 25%Growing income 12%Steady profitability 15%Supporting debt 35%

Quality for utility companies: illustrated explanation; the same checks are explained below. — Open the full-size image in a new tab.

01 / Read the result

What does the number tell you?

0Lower score

A higher score means stronger results on these checks.

100Higher score

Each part receives points from 0 to 100. The percentages above show how much each part counts. A higher total means stronger results on these checks.

02 / Explore the business

Questions behind the score

The percentages show how much each part counts.

Using money well

How much does the utility earn from the money invested in its business?

13%of the score

A simple example

A 10% annual return means$10 earned for every $100 used

This describes a return in the business, not the return you receive on your shares.

See how the points are calculated

▸Return on capital – 13%: We use a return measure called ROC to assess earnings relative to capital. Its scale runs from 3% at 0 points to 10% at 100 points.

Cash behind owner payments

Does cash from operations support payments to owners and reported profit? Investment spending comes afterwards.

25%of the score

A simple example

$200 million from operations÷$100 million paid to owners=2× covered

Cash covers the payment twice, but investment spending still needs funding.

See how the points are calculated

▸Cash generation – 25%: We compare cash from operations with dividends paid to shareholders (60% of this part). We also compare operating cash with reported profit (40% of this part). The first comparison shows whether operations generate enough cash for dividends before the company pays for investment spending.

Growing income

Is income growing for each share?

12%of the score

A simple example

Income per share$10 → $11=10% growth

Using an amount per share allows for changes in the number of shares.

See how the points are calculated

▸Business trend – 12%: We examine growth in revenue per share.

Steady profitability

How steadily does income remain as profit after running costs?

15%of the score

A simple example

Profit from each $100 of income$10 · $10 · $10across three years

Steady positive profits are more reassuring than results that swing sharply.

See how the points are calculated

▸Profitability stability – 15%: We examine how steadily a share of revenue remains after operating costs.

Supporting debt

How well do funds from operations support interest and debt? How much of the funding is borrowed?

35%of the score

A simple example

$40 borrowed÷$100 total funding=40% debt

A smaller debt share leaves more room when results weaken.

See how the points are calculated

▸Financial strength – 35%: We use a measure of funds from operations called FFO. We compare it with interest costs (40% of this part) and with debt (30% of this part). Debt relative to total capital also contributes (30% of this part). This considers both payment capacity and the size of the debt burden. Utility FFO is a different measure from the property-company FFO explained below.

Missing figures reduce the information supporting the score and may change how much each remaining check counts. With too little usable information, no score is shown. Read the notes beside the company’s score. A usable return measure is required.

03 / Look a little closer

How we calculate the points

Explore the calculation, the periods used and the information behind the result.

How the checks add up

Utility companies

Utilities often invest large amounts in electricity networks, pipes and other infrastructure. We therefore give particular attention to debt and payment capacity. Large investments can leave free cash flow low even when operations perform well.

What happens when figures are missing?

A poor result and a missing figure are different things. A poor result lowers its part of the score. When a figure is missing, the other parts may receive more weight. We also show that the assessment is based on less information.

We measure how much of the calculation has usable information. We use the component weights, so a missing measure with a large share matters more. At least 90% normally gives High confidence, 70% to below 90% gives Medium, and 60% to below 70% gives Limited. Confidence can be lower when some figures rely on an alternative calculation.

We do not show an overall Quality score if usable information covers less than 60% of the calculation. We also need a usable return-on-capital measure. Without it, we do not show the score. For a bank, we use the corresponding bank return measure.

A measure that is not used for that business type does not count as missing. For example, we do not assess a bank using the standard free cash flow calculation.