MANILA, Philippines — A company that earns billions of pesos every year is usually considered successful. If its profits remain positive and return on equity (ROE) is respectable, we may assume that management is creating value for shareholders.
But ROE can sometimes be misleading. Two companies may generate similar ROEs, yet shareholders may demand different returns because the risks of owning their shares are not the same.
Shareholders provide capital and accept the risks of ownership, so they expect a certain minimum return. Is the return that the company generates high enough to compensate them for that risk?
In a 1995 study, University of British Columbia professor Gerald Feltham and Columbia University professor James Ohlson showed the market value of a company could be represented as book value plus the present value of its expected future abnormal earnings. They defined abnormal earnings as accounting earnings after deducting a charge on the book value of shareholders’ capital.
More recently, Columbia Business School professor Stephen Penman and Francesco Reggiani showed how accounting fundamentals can help investors differentiate between expected growth and the risk associated with that growth. Their research shows why returns need to be evaluated together with risk.
These studies suggest that earning a profit alone is not enough because shareholders’ capital comes at a cost. So, one way to apply this principle is to compare a company’s ROE with the return investors require.
To measure this, we can use Value-Added ROE, which is ROE minus the required return. A positive Value-Added ROE means that a company earns more on shareholders’ equity than investors require for the risk. A negative figure means that its return fails to clear that hurdle.
For example, Meralco generated a trailing ROE of 24.9 percent, while its estimated required return was only 10.5 percent. This gave the company a Value-Added ROE of about 14.4 percentage points.
DigiPlus generated an even higher ROE of about 27.4 percent. But because its estimated required return was much higher at 15.6 percent, its Value-Added ROE was lower at about 11.8 percentage points.
DigiPlus generated the higher accounting return, but after the level of risk was considered, Meralco generated the higher Value-Added ROE.
Now, if we apply this framework to all 30 constituents of the Philippine Stock Exchange index (PSEi), we find that only 13 companies, or 43 percent, generated positive Value-Added ROE. The remaining 17 companies, or 57 percent, generated ROEs below their estimated required returns.
Across the 30 PSEi companies, the median Value-Added ROE was negative by about 0.5 percentage points. This shows that the typical PSEi company earns slightly less than the return investors require for the risks they take.
Among those with the largest shortfalls was ACEN Corp., which generated an ROE of about 4.2 percent compared with an estimated required return of 12.4 percent. Its Value-Added ROE was negative by about 8.2 percentage points.
JG Summit Holdings generated an ROE of about 6.2 percent against a required return of 14.2 percent, while Ayala Corp. generated an ROE of about 7.3 percent against a required return of 15.2 percent. Their Value-Added ROEs were negative by about 8.0 and 7.9 percentage points, respectively.
These companies remained profitable, but their returns on shareholders’ equity were not high enough to clear their estimated hurdle rates.
At the other end of the spectrum, several PSEi companies generated returns well above their required rates.
The strongest result came from International Container Terminal Services, Inc. or ICTSI. It generated a trailing ROE of about 46.8 percent against an estimated required return of 13.8 percent. This produced a Value-Added ROE of roughly 33 percentage points, which is by far the highest among the PSEi companies in the study.
PLDT posted Value-Added ROE of about 12.2 percentage points, followed by Semirara Mining at 11.2 percentage points and Century Pacific Food at about 6.3 percentage points.
The magnitude of the results also reveals an interesting pattern. Of the 13 companies with positive Value-Added ROE, six generated double-digit returns above their required rates. In contrast, none of the 17 companies with negative Value-Added ROE had a double-digit shortfall.
So, while more PSEi companies failed to clear their required returns, their shortfalls were relatively limited compared with the value created by some of the strongest companies.
Interestingly, some of the country’s largest banks sat almost exactly at the dividing line between positive and negative Value-Added ROE.
Metrobank’s ROE of about 11.8 percent was only 0.5 percentage points below its estimated required return. BDO’s Value-Added ROE was also negative by about 0.5 percentage points, while BPI was similarly short by roughly 0.5 percentage points.
This suggests that these banks currently generate returns close to what investors theoretically require for their level of market risk.
Looking ahead, the picture could become more challenging if economic and market uncertainties increase. Higher interest rates and greater uncertainty can increase the returns investors require. If corporate ROEs fail to improve, more companies could end up destroying shareholder value. INQ
Henry Ong is a Registered Financial Planner of RFP Philippines. To learn more about investment planning, attend the 118th batch of RFP Program this October 2026.
To register, email at info@rfp.ph.