BLUE RIBBONS

Everybody likes to be first at something--at least once in a while.

For publicly held companies in California, there are lots of ways to climb to the top of the heap, at least for one year, because there are myriad ways to measure their financial performance.

Pick a category and who knows? In some cases, the blue ribbon goes to a big company with a household name. In others, the winners are fledgling outfits with names that are little more than unfamiliar jumbles of letters.

As in past years, The Times 100 includes charts ranking the companies by several venerable benchmarks, such as sales, earnings, return on equity and market capitalization. But this time, we also checked some less popular--yet still vital--gauges.

To find more names that placed first in some way, we ranked California companies in these other categories, based on data from the Market Guide for Windows, a CD-ROM product sold by financial services firm Market Guide Inc. and the main source of data throughout this section. The results are interesting not only for their diversity, but also because they highlight stocks that might be of interest to investors.

Some categories are variations of the familiar: price-to-earnings ratio, sales and earnings growth trends, insider ownership and the like. Others, though, aren’t commonly talked about but can be useful in figuring a company’s prospects. And a few are, well--let’s just say they have their followers.

The usual caveats: No one measure is the only way to evaluate a company or its stock. And one year’s results do not a whole picture show. A firm might be atop a category for last year simply because of some one-time event (special dividend, a merger or divestiture, floods that won’t occur again this year). And where that’s the case, we’ll point it out.

So, having said that, let’s see the best of show in 1996:

Five-Year Profit Margin and EPS Growth Rates

This is an excellent place to start because it illustrates how even bluebloods of financial analysis like these don’t disclose the whole story.

The first category measures how rapidly a firm’s profit margin--that is, how many cents per dollar of sales it’s earning after taxes and all other costs have been paid--has been widening for the last five years. It’s a good way to see which companies are squeezing more and more profit from their business.

The companion measure is fairly obvious, showing which companies have maintained the fastest-growing rate of earnings per share. (Be careful, though, because a company that routinely buys back its own stock can get a leg up in this category.)

And guess what? The winner in both rankings--KIT Manufacturing Co. of Long Beach--lost money in its fiscal first quarter ended Jan. 31. KIT makes fabricated houses and recreational vehicles, and it blamed the loss on bad weather in the period, which pushed RV sales lower. But management said it’s “very optimistic” things will get rolling again. The future, of course, is always uncertain. But going back five years, KIT comes out first.

Historical Relative Price-to-Earnings Ratio

Here’s one version of the commonly used P/E ratio, which divides the stock price by a company’s earnings per share and effectively tells an investor how much they’re paying for a company’s earning power.

Take a company’s annual P/E ratio for the last five years, find its mean, and you have the historical number. Translated: It shows which companies keep trading for long periods at very high prices relative to their profit.

First place goes to software maker Caere Corp. of Los Gatos, and it didn’t win because Wall Street keeps bidding up its stock price well ahead of its earnings. No, Caere won because in the early 1990s, the company’s stock was white-hot in anticipation of swelling profit, with shares soaring from $8 to nearly $25 each.

But when profit didn’t surge, Caere’s stock plunged in early 1993. Still, if you cover a five-year period you include that early excitement and Caere wins.

One-Year P/E Ratio

What if we go back just a year and see which company’s stock had the highest price relative to its expected profit? For 1996, the winner is Petco Animal Supplies Inc., a San Diego-based retail chain.

Petco’s stock jumped sharply in early 1996, sending its P/E soaring, then spent the rest of the year sliding back to about where it began.

But the stock’s P/E remains at an exceptionally high level because Petco is expanding and spending money aggressively to buy other pet supply stores and new locations lately, especially in Rocky Mountain and Midwestern states. Petco bought P.T. Moran, Pet Nosh, Pets USA, Pet Food Warehouse and Pet Supply Warehouse. Indeed, it posted a $12-million loss in its fiscal year ended Feb. 1, although the P/E ratio is still positive because the merger costs are considered “extraordinary” and added back to calculate the ratio.

The high P/E is a signal that investors clearly expect Petco to digest these acquisitions and continue growing at a fast pace as it opens dozens of additional locations and superstores.

Projected One-Year P/E Ratio

If we try it another way, and look at which company’s stock is trading at the highest price relative to what analysts expect its next annual earnings per share to be, first place goes to DAOU Systems Inc.

DAOU, based in San Diego, makes computer systems for hospitals and other health-care firms. Its stock trades for a modest $8 a share, but that’s a lot compared with the 3 or 4 cents per share DAOU is expected to earn this year.

In 1998, however, analysts see DAOU earning more than 40 cents a share--and that’s the surge in profit investors are paying for today.

Insider Ownership

This is always a good measure of a company and its stock because it immediately indicates two things: whether the people who run the company are as willing as you to own the shares (and presumably work harder to make the stock rise) and whether there’s much of a public float for the stock.

Market Guide reports that the California company with the highest insider ownership, at 98%, is Media Arts Group Inc., a San Jose producer of art and collectible gifts, such as miniature cottages and figurines, lithographs and gifts related to the entertainment industry.

Media Arts’ most recent financial reports place the ownership at closer to 80%, but regardless, both figures sound bullish for anyone else interested in buying the stock.

But it also means a small number of shares are floating around for the public. That could make things tough when you go to buy or sell Media Arts--a situation Wall Street calls “poor liquidity”--which means you might not get the price you’re looking for. It’s also a key reason why few analysts bother to follow the company.

Five-Year Gross Margin Growth Rate

A mouthful of a term, but a good way to see which companies are operating their businesses most efficiently. A gross margin is what a company earns after paying its production costs but before taxes and interest payments, and it is expressed as a percentage of its sales. Measure which firms’ gross margins have been growing the fastest for the last five years and you have this category.

The winner is Trimedyne Inc., an Irvine-based maker of medical laser systems, including ones that treat severe cardiac disease and urological ailments. Trouble is, Trimedyne is struggling to win widespread acceptance of its systems, while having to keep spending to develop products. The result: Trimedyne hasn’t turned a net profit for the last five years. But its goods seem to be produced with exceptional efficiency.

Beta

Here’s a yardstick that’s shunned by many conservative investors yet followed closely by many others who believe it’s a good way to find or eschew stocks that fluctuate widely.

Beta is a mathematical measure that simply indicates a stock’s volatility. The higher the beta, the higher its volatility.

So which risky, cutting-edge, high-technology stock is at the top? None. Instead, it’s sleepy Glendale Federal Bank, the once-ailing thrift whose financial performance and stock price have rebounded strongly in recent years and which won a major legal victory against the U.S. government.

But a volatile stock? Go figure.

Cash Flow Growth Rate

A very important measure but one that’s defined in different ways by different analysts, which naturally confuses investors.

Market Guide defines cash flow as a company’s income after taxes, interest and preferred dividend payments, but with its depreciation, amortization and any depletion allowances added back in.

Other yardsticks of cash flow add taxes and interest back as well, which provides an acronym you might have seen: EBITDA, or earnings before interest, taxes, depreciation and amortization.

In any case, savvy investors look at cash flow because it shows how well a company is generating cash in excess of what it needs each day to run its operations. And which companies do it well?

The company with the best five-year growth rate in cash flow is Spelling Entertainment Group Inc., the Los Angeles television and movie studio. It’s followed by Nanometrics Inc., a Sunnyvale provider of instruments used in making semiconductors.

One-Year Interest Coverage

Here’s a handy way to see whether a company can easily make payments on its debt with its own earnings. Companies with no long-term debt typically score well because they need only worry about meeting smaller, short-term debt obligations. The ratio is found by dividing a company’s earnings before interest and taxes by its interest cost for the last 12 months.

Top debt servicers here are two Sunnyvale firms: Maxim Integrated Products Inc., a producer of electronic components, and SanDisk Corp., a maker of image- and audio-storage devices.

Times Markets Editor Daniel Gaines assisted with the research for this article.