A company can report billions of pesos in profits and still fail to generate enough return for the risks investors take. Comparing return on equity with the return investors require provides another way to identify which companies are creating value.
A company that consistently earns a profit is generally considered successful. If its return on equity is also high, investors may assume that management is making good use of shareholders’ money.
But profitability alone does not necessarily mean that a company is creating enough value for investors.
Shareholders provide capital to a company and accept the risks that come with owning its shares. They therefore expect to earn a certain return for taking that risk. The relevant issue is not simply whether a company earns money, but whether the return it generates is high enough relative to the risk investors assume.
This analysis is based on the article “Why Being Profitable Does Not Always Create Shareholder Value?” by Henry Ong, published in the Philippine Daily Inquirer on September 23, 2026. The original study compared the return on equity of the 30 companies in the Philippine Stock Exchange index with the return investors would require for owning each stock.
Looking beyond ROE
Return on equity, or ROE, tells investors how much profit a company generates from the equity invested in the business.
Suppose a company has ₱100 billion in shareholders’ equity and earns ₱15 billion. Its ROE would be 15 percent.
Normally, a higher ROE would be considered better. But consider two companies that both generate an ROE of 15 percent.
If investors require only a 10 percent return from the first company because of its relatively lower market risk, its 15 percent ROE exceeds that hurdle by five percentage points.
If the second company is riskier and investors require a 17 percent return, the same 15 percent ROE falls short by two percentage points.
Both companies are profitable. Both have the same ROE. But they have not created the same amount of value relative to the risks investors take.
What is Value-Added ROE?
One way to measure this difference is through Value-Added ROE.
The concept is simple. Value-Added ROE is the company’s return on equity minus the return investors require.
A positive result means the company generates an ROE above the return required for its risk. A negative result means the company remains profitable, but its ROE does not clear that hurdle.
The idea has roots in academic research. In a 1995 study, University of British Columbia professor Gerald Feltham and Columbia University professor James Ohlson showed that the market value of a company could be represented by its book value plus the present value of expected future abnormal earnings. They defined abnormal earnings as accounting earnings after deducting a charge for shareholders’ capital.
More recent work by Columbia Business School professor Stephen Penman and Francesco Reggiani examined how accounting fundamentals can help investors distinguish between expected growth and the risk associated with that growth. The underlying principle is straightforward: returns become more meaningful when investors also consider the risk required to generate them.
How the required return was estimated
To determine whether a company created value, we first needed to estimate how much return investors should require from each stock.
For this analysis, the required return was estimated using the Capital Asset Pricing Model, or CAPM.
The calculation begins with the return available from a relatively low-risk investment. We used a 7.23 percent Philippine 10-year government bond yield as the risk-free rate.
Investors who buy stocks take more risk than investors who hold government securities. They therefore expect an additional return for accepting the uncertainty of owning equities. For the study, an equity risk premium of 6 percent was used.
The final element is beta, which is different for every stock.
Beta measures how sensitive a stock has historically been to movements in the overall market. A beta of 1 suggests market sensitivity roughly similar to the market. A beta above 1 indicates greater sensitivity, while a beta below 1 indicates lower sensitivity.
The required return can therefore be expressed simply as:
Required Return = 7.23% + (Beta × 6.0%)
Because each stock has a different beta, each company also has a different required return.
Why risk changes the picture
Meralco provides a useful example. Its beta was about 0.55. Multiplying this by the 6 percent equity risk premium gives 3.3 percentage points. Adding this to the 7.23 percent government bond yield results in an estimated required return of 10.53 percent.
Meralco generated an ROE of about 24.9 percent. Its Value-Added ROE was therefore about 14.4 percentage points.
DigiPlus presents a different picture. It generated an even higher ROE of about 27.4 percent. But its beta was 1.40, considerably higher than Meralco’s.
Its estimated required return was therefore:
7.23% + (1.40 × 6.0%) = 15.63%
After accounting for that higher hurdle, DigiPlus generated Value-Added ROE of about 11.8 percentage points.
DigiPlus had the higher ROE, but Meralco generated the larger return above what investors required for its risk.
This is why looking only at ROE can sometimes produce an incomplete picture.
How the PSEi companies performed
When this framework was applied to the 30 PSEi companies, 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.
The median Value-Added ROE was also slightly negative at around 0.5 percentage point.
The accompanying infographic provides the rankings and individual Value-Added ROE figures, making it easier to see the difference between the strongest and weakest results.
ICTSI stood well above the rest. It generated an ROE of about 46.8 percent against an estimated required return of 13.8 percent. This resulted in Value-Added ROE of roughly 33 percentage points, the highest among the PSEi companies in the study.
Meralco, PLDT, DigiPlus, Semirara Mining and RCR were also among the companies with substantial positive Value-Added ROE.
Interestingly, six of the 13 companies with positive Value-Added ROE generated double-digit returns above their estimated hurdles. None of the 17 companies on the negative side had a double-digit shortfall.
A profitable company can still fall short
At the other end of the ranking were companies that remained profitable but did not generate ROEs high enough to compensate for their estimated market risk.
Ayala Land provides a good example. Its beta was about 1.52, giving it an estimated required return of 16.35 percent. But its ROE was only about 9.14 percent.
Its Value-Added ROE was therefore negative by approximately 7.21 percentage points.
ACEN generated an ROE of only about 4.2 percent compared with an estimated required return of about 12.4 percent. JG Summit generated an ROE of about 6.2 percent against a required return of 14.2 percent, while Ayala Corp. generated about 7.3 percent against a required return of approximately 15.2 percent.
None of this means these companies were losing money. They were profitable.
The issue is that the return generated from shareholders’ equity was below the estimated return investors required for owning their shares.
Some banks were close to the line
Some of the country’s largest banks were much closer to the dividing line between creating and falling short of the required return.
Metrobank generated an ROE of about 11.8 percent and fell short of its required return by only around 0.5 percentage point. BDO and BPI were also short by roughly half a percentage point.
A small negative figure should therefore be interpreted differently from a company whose ROE falls several percentage points below its hurdle.
Profit is only the starting point
Investors should not stop looking at earnings or ROE. Both remain important measures of corporate performance.
Value-Added ROE simply asks investors to take the analysis one step further.
If a company generates an ROE of 8 percent while investors require 14 percent for the risks involved, the company is profitable, but the return may not be sufficient.
On the other hand, a company earning 15 percent when investors require only 9 percent may be creating considerable value even though its headline ROE does not appear extraordinary.
The difference helps explain why the highest ROE company is not necessarily the company creating the most value relative to risk.
Profit tells investors whether a company makes money. Value-Added ROE tells if a company makes enough money from shareholders’ capital to compensate investors for the risk they take.
