Philippine Markets Newsletter

PH Monday Macro: PSE-listed corporations continue their strong momentum in 2022 according to this profitability metric

May 8, 2023

The Philippine economy rebounded in 2022 and was among the fastest economies to grow in the emerging markets. Manufacturing output and service sector growth propelled the country’s economic expansion.

To see how Philippine businesses have continued their recovery momentum from 2020 to 2022, we turn to this profitability metric representative of companies, viewed under the Uniform Accounting lens.

Philippine Markets Newsletter:
The Monday Macro Report
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The year 2022 was an excellent year for the Philippines. Travel restrictions were removed, making it easier for tourists to come back, plus the number of reported COVID-19 cases continued to drop.

In the post-pandemic recovery, household final consumption expenditure (consumer consumption) that is responsible for 76% of value added to GDP grew by 14% year-over-year. This led to a GDP growth of 7.6%, the fastest rate it has seen since 1972.

The macroeconomic conditions and robust consumer demand also indicate that businesses were experiencing upward sales growth. So, to determine how businesses fared, we will look at the aggregate return on assets (ROA) for Philippine companies, specifically those publicly listed on the Philippine Stock Exchange (PSE).

Looking at the ROA of a business is one of the best metrics for investors to understand a company’s profitability and performance. This is because it measures margins and asset turns.

The ROA tells us how wide the company’s margins are and the company’s level of efficiency in using its assets to generate earnings. Therefore, the higher the ROA is, the higher the quality of the firm, holding all else constant.

In order for us to get an idea of the overall state of Philippine companies, let us evaluate the aggregate ROA of PSE-listed companies.

Looking at as-reported metrics (in orange), it can be seen that Philippine corporations are starting to recover from the pandemic tailwinds. Yet, they are still lagging behind the global corporate average of 6%, not even breaking even amid the 2022 recovery.

However, as-reported metrics fail to show the real profitability levels of the market, which is why we turn to Uniform Accounting (in blue) to clean up the accounting noise.

These adjusted numbers give us a more accurate picture. As-reported ROA fails to reorganize items by its nature, such as distinguishing between operating and non-operating items, which distorts profitability.

Through Uniform Accounting, we remove any distortions by adjusting items based on its operations, cash movement, and matching principle.

For instance, interest expense is under operating cash flow, when in reality it is a financing cash flow. As such, in Uniform Accounting, we add back interest expense to earnings.

Factoring that in, Philippine corporations began outperforming the global corporate average of 6% in 2010 onwards. While it fell from the average in 2020, it has since gained momentum in 2021 despite waves of the Delta variant.

With that, Uniform ROA has recovered to 7% in 2022 and has exceeded the global corporate average due to growth in consumer consumption.

We can expect this momentum to be sustained with the Philippines entering the Regional Comprehensive Economic Partnership (RCEP) Agreement last February 2023, the world’s largest free trade agreement.

This government initiative will help the Philippines to increase exports as well as its GDP, supporting corporate growth.

Lastly, supply chain shortages that drove prices higher could be curbed this 2023 as China reopens. With China representing 21.8% of total imports, Philippine companies could be rewarded with lower input costs, thus expanding margins.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
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