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Why I expect successful companies like Xero Limited will keep winning

One of the great things about being a successful something is that people want to be associated with you.

Parents want their children associated with the most successful schools. Brands want to be associated with the most successful sports teams. And, after years of hard graft, graduates want to be associated with the most successful companies.

Successful companies come with attractive long term earning potential, but they also come with social mana. “Wow!” people will say when you tell them about working for Google, before asking about the free food.

Xero Limited (ASX: XRO) is one such company. The cloud accounting platform recently hired a friend of mine after he decided it was a company he wanted to work for. Xero had no positions for his skill set at the time, but he was an ideal fit when a role came up months later.

Success breeding success

It may not seem like an important investment attribute, but think about how incredibly powerful this is!

If Xero can attract the brightest prospects, and pick from stronger candidates than competitors, then they can also build better products and create greater efficiency. The result is stronger competitive advantages and higher potential long-term returns for investors.

For desirable companies the long-term benefits are huge. Not only is the cost to find new candidates much lower when they show up on your doorstep, but with high employment rates and a war for skilled people in the tech industry the only way to successfully deliver on growth plans is through a big pool of exceptional candidates.

Can we measure desirability?

One approach to measuring the qualitative ‘desirability’ factor  is to look at feedback on employer review website Glassdoor.

Xero, for example, has a ‘recommend to friend’ rating of 72% suggesting happy employees and a good level of engagement. Fellow software company Gentrack Group Ltd (ASX: GTK) has a 75% recommendation rating.

Meanwhile Orion Health Group Ltd (ASX: OHE) which has been slashing costs and reducing staff sits at just 43%.

The sample sizes on Glassdoor are very different, but if I was a prospective candidate, a 43% recommendation rate would be a red flag.

When evaluating a business’s long-term earning potential, especially for delivering growth, this is a valuable factor to remember.

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Motley Fool contributor Regan Pearson owns shares of GENTRACK FPO NZ and Xero.

You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia owns shares of Xero. The Motley Fool Australia has recommended GENTRACK FPO NZ. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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