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A 500 newcomer leapfrogs to No. 140
An obscure financial services firm owes its rise less to its own business than to GAAP rules on the sale of goods.
NEW YORK (Fortune) -- Close readers of the Fortune 500 might have noticed that a relative newcomer to the list jumped past hundreds of companies to land at No. 140, with more than $18 billion in sales.
With revenues per employee totaling $94.2 million and revenues per dollar of assets at $42 million total, No. 140, which barely registers a price-to-sales ratio (share price divided by revenue per share), is an obscure financial services firm called International Assets Holding Corporation (INTL) with 185 employees as of its latest corporate filing in December. It tops all of Fortune's ``Most Bang For the Buck" lists.
How such a small enterprise landed in front of industry giants Halliburton (HAL, Fortune 500) and Union Pacific (UNP, Fortune 500), and list stalwarts like CBS and Campbell Soup (CPB, Fortune 500), has less to do with its business and more to do with the Generally Accepted Accounting Principles that govern corporate filing requirements.
Close readers of the list would also have read about it in the 500 footnotes: "Company reports sale of physical commodities on a gross basis."
"It's a very confusing number," says CEO Sean O'Connor, a former London banker who, with a partner, invested his own money and took control of International Assets in 2002. "We trade a lot of gold. And because we're trading physical commodities and not futures, GAAP requires us to record the nominal value. So that revenue number rises very quickly."
In fact, sales have increased 39-fold since 2006 , when International Assets entered a Dubai joint venture trading and selling gold. Ninety nine percent of 2008 sales come from its commodities business.
As the physical storage and delivery part of the business eclipsed the financial trading part -- the company delivers gold in Dubai for commercial purposes such as jewelry making and manufacturing -- GAAP rules forced the company to record sales on a gross basis.
In other words, the entire sale is recorded as revenue, instead of just the spread between cost and sale price. Middlemen operations like trading businesses, which clear stocks or bonds, book net revenues on the spread.
Businesses like Costco record gross revenue on sales of groceries and Exxon record gross oil sales because they take physical delivery of goods, and are therefore exposed to a loss.
International Assets also has segments of its business focused on creating equity markets in small countries; trading currencies; and asset management. Larger banks rely on the Altamonte Springs, Fla., company's expertise in niche markets. For example, International Assets trades currencies for Bank of America and Unicef, and provides unlisted ADRs for Fidelity Investments.
Shares have dropped 48% in the past year along with other financial services firms. But net income actually increased to $28 million last year from loss in 2007, and it has a healthy five-year average return on equity of 19%.
"Think of them as taking the toll on a bridge," says Graeme Rein, research analyst at Bares Capital Management, a small cap investing firm and International Assets' second largest shareholder. "They make money as long as people are trading. They're in such small, illiquid markets that require a certain amount of experience, and International Assets provides an attractive service."
For example, it helped a small Nigerian bank called First City Monument Bank raise funds through a global trade program and eventually become one of the country's leading national banks.
"We look for opportunities from $7 million to $30 million in size if we get them right, says CEO O'Connor. "You stay below the big boys, like Goldman Sachs (GS, Fortune 500), by doing that."
In fact, Wall Street's meltdown is a boon for small firms such as International Assets, which should gain market share as bigger banks scale back to focus on core businesses.
"You see real robust global operators like Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) retreating from global research to core businesses," says Jeremy Hellman, analyst at Singular Research who rates International Assets a "buy." "These small markets just aren't going to be needle movers anyway, so now it's a place where they can cut some costs."
They are needle movers for International Assets, which has leveraged experience in obfuscated markets to provide solid returns, even if $94 million in sales per employee rings a little truer on paper than in reality. 
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