Berlingske's Guld1000 Makes Us Dumber

The name "Guld1000" suggests that the top-ranked company on the list is the most valuable, but this isn’t the case, as Novo Nordisk, ranked seventh, is ten times more valuable than Mærsk. When assessing the strength of our companies, we need to dig a bit deeper and ask different questions.

24638059 Lars Fruergaard Jørgensen from Novo Nordisk is Cheap
It’s a bit too easy to create a list that ranks the nation’s companies by revenue.

Most people could probably quickly place A.P. Møller – Mærsk A/S and Novo Nordisk in the top ten on such a list. We may also be surprised to see some electricity trading companies storm into the top ten because electricity prices have soared.

Suddenly, we’ve created the impression that Denmark's strongest and largest companies should be measured by their revenue.

This is dangerous and concerning.

The name "Guld1000" suggests that the top-ranked company on the list is the most valuable, but this isn’t the case, as Novo Nordisk, ranked seventh, is 20 times more valuable than Mærsk. When assessing the strength of our companies, we need to dig a bit deeper and ask different questions.

The most interesting word is neither revenue nor market value. It's actually the resilience or robustness of companies. This is what we should consider when looking at the business world and Berlingske's Guld1000 list. This is what the business sector should think about.

Not All Revenue is Equal

A strategy based on resilience emphasizes that not all revenue contributes equally to making a company future-proof and valuable. The effort to increase the predictability—and thus the resilience—of your revenue is often a better investment than simply chasing pure revenue.

When we evaluate the quality of a company’s revenue, we can divide it into three categories based on predictability.

1. Fixed Revenue: This is revenue guaranteed for at least the next 12 months. It could be annual licenses and subscriptions, prepaid deliveries, guaranteed revenue in framework agreements, and contracts. The definition of fixed revenue is that, regardless of what happens, the customer is legally obligated to pay.

2. Predictable Revenue: Here, we don't know precisely which customer will generate the revenue, but based on our insights into customers' budgets, the number of customers, and their historical behavior, it’s possible to estimate revenue in this category with a 20–30% margin, even in times of great uncertainty.

3. Variable Revenue: This type of revenue is the hardest to predict. It typically comes from new customers in our pipeline or from new projects or services for existing customers that we didn’t know about at the start of the year. For many companies, the majority of revenue falls into this category.

A company's valuation is often closely tied to its mix of these three types of revenue. For fixed revenue, the valuation is often close to 20 times earnings before interest, taxes, depreciation, and amortization (EBITDA). For predictable revenue, the valuation can be ten times EBITDA, and at the other end, variable revenue is often valued at a multiple of five or less.

Think about it. When we look at electricity traders or grain merchants who suddenly see their revenue explode because inflation is soaring, we shouldn't be overly impressed by their revenue. Instead, we should be critical.

You might argue that if you don’t plan to sell your company or the shares in the company where you’ve invested your savings, why should you care about resilience and thus the quality of the valuation?

Paying More for Better Revenue

The simple answer is that if a buyer is willing to pay up to four times more for your company if its business model relies on fixed and predictable revenue, then the resilience that fixed revenue entails should also create value for you as an owner or shareholder through long-term, stable, and predictable earnings. You would probably rather own a part of Novo Nordisk than a part of an electricity trading company.

How Do We Build Resilience?

The essence of resilience as a strategic approach is that by improving the predictability of a company’s revenue, we increase the company’s long-term stability and thus value. By creating more predictable revenue, we can enhance the company’s value more than an equivalent investment in sales that generates new variable revenue.

When creating new budgets, business leaders are often extremely focused on revenue growth, especially in times of rising costs. The instinctive reaction is that increasing revenue should compensate for rising costs, even if market trends don’t necessarily support it.

Lack of a Good Alternative

Based on resilience as a strategic approach, we would change our focus and use more energy on preparing the predictability of our existing revenue, thereby increasing the company’s value.

This can be systematically pursued, for example, by focusing on delivering services instead of products, pursuing licenses and subscriptions rather than single transactions, getting customers to pay in advance, or entering binding agreements on business volume in exchange for discount agreements.

I shake my head a bit when I hear all the buzz about the Guld1000 list because my job is to make companies stronger by increasing their resilience and thereby their value. On the other hand, I must also admit that I have a problem when I criticize Berlingske's list. Unfortunately, there is no Guld1000 list for Danish companies’ resilience. Now, that would be truly interesting.