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Originally published Saturday, June 15, 2013 at 8:04 PM

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How we ranked the companies

Great companies thrive on innovation — finding new solutions to old problems, better ways of handling everyday tasks, or anticipating needs and desires other people aren’t even aware of.

Seattle Times business reporter

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Given the diversity of companies in the Pacific Northwest — software to shoes, cardboard to coffee, airlines to airwaves — developing a single scale on which to rank them all is hardly an easy task. No single metric or ratio can be equally applicable or appropriate to all companies.

So we hedge our bets. We employ four separate measurements of corporate performance, each targeting a different aspect of a company’s operations, then combine them into a single ranking using our proprietary formula.

But first, a little pruning. Out of the 125 Northwest companies that were publicly traded on a major exchange at the end of 2012, we first dropped the 20 whose share price fell below $2 at any point during the year. That eliminated such names as Cell Therapeutics and Coldwater Creek from consideration.

We also cut the five companies that went public in 2012, and the one (Sound Financial Bancorp) that graduated from the OTC Bulletin Board to Nasdaq. They’ll be eligible next year after they’ve had a full year of trading in the big leagues.

One company (Pixelworks) moved its headquarters out of the Northwest; another (SeaBright Holdings) was acquired early in 2013, before it reported its year-end financial results. In the end, 97 companies qualified for ranking.

Companies were ranked on their return on invested capital, free cash-flow yield, asset turnover and stock-price appreciation. Free cash-flow yield carried the most weight, but no measure predominated; companies had to perform well in every category to rise to the top.

We gathered most of the raw data from Bloomberg News, supplemented by company reports filed with the Securities and Exchange Commission. The companies were first ranked separately on each metric; the four subscores were then weighted and combined into an overall score.

To minimize distortions due to companies’ differing fiscal years, we used trailing 12-month data (as of early April) for all rankings except stock price, which was based on calendar 2012. Companies that had negative free cash flow or whose stock lagged the Russell 3000 got zero points in those categories.

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