Why more PSE firms are struggling to maintain strong profitability

When measuring how well a company uses its assets, most investors turn to return on assets (ROA). This is a familiar ratio that is easy to calculate and found in almost every finance textbook.

The problem with ROA is that, because it uses net income, it mixes operating performance with the effects of financing and tax decisions. By stripping out interest and taxes and focusing instead on operating income—or earnings before interest and tax (Ebit) relative to total assets—we get a clearer view of a company’s true operating profitability.

For example, two companies with identical business models, let’s say Universal Robina (URC) and Monde Nissin, can report very different ROAs. This is simply because one carries more debt or is affected by one-time charges.

Based on their 2024 financials, URC reports a ROA of 6.8 percent, which is higher than Monde’s 0.6 percent. However, if we strip out Monde’s one-time impairment loss and focus on operating performance, Monde actually shows a stronger return. It has an Ebit to Total Assets ratio of 16.2 percent, compared to URC’s 9.3 percent.

This makes ROA less useful if you’re trying to assess how the business actually performs. In volatile markets or during economic downturns, this distinction matters. ROA might still look respectable if a company is benefiting from low interest rates or tax breaks. But Ebit/TA forces you to ask a more fundamental question: Is the business truly generating real returns from the capital it has been given?

In 2007, a research study by Edward Altman and Gabriele Sabato of New York University argued that earning before interest, taxes, depreciation and amortisation (Ebitda) to Total Assets is one of the most statistically significant predictors of default. While their model focused on Ebitda, the same logic applies to Ebit to Total Assets (Ebit/TA). This removes the effects of noncash items like depreciation and offers a sharper view of core operating efficiency

The study emphasizes that if a company cannot consistently generate operating income from its asset base, it likely lacks the internal strength to withstand financial shocks. This makes Ebit/TA a powerful, forward-looking indicator of resilience. But it is not just a theory. Ebit/TA is also used in Moody’s KMV model as a key input in assessing a company’s probability of defaulting on its debt.

So how should Ebit/TA be interpreted in practice? Over time, practitioners have established benchmark ranges to assess a company’s operating strength.

Companies with Ebit/TA above 15 percent are typically considered highly efficient and operationally strong—often market leaders with durable business models and solid pricing power.

Ratios between 5 and 15 percent are still viewed as healthy, which indicates stable operations and reasonable margins. But when Ebit/TA drops below 5 percent, concerns begin to emerge. This is usually where margins are tight, and the company may struggle to generate enough profit to comfortably cover its fixed costs.

In fact, companies with Ebit/TA below 2 percent may already be operating near breakeven, which makes them highly vulnerable to even small disruptions—such as rising costs, currency fluctuations or interest rate hikes. At this level, the risk of default increases significantly, especially for firms carrying substantial debt or facing working capital pressures.

If we look at the companies listed on the Philippine Stock Exchange, we’ll see that the median Ebit/TA ratio has been falling. This is from 6.7 percent before the pandemic in 2019 to just 4.5 percent today.

See Also

Globe earnings in first quarter rose 3% to P7B

Looking closer, we also find that the number of strong companies—those with an Ebit/TA ratio above 15 percent—has declined from 12.6 percent in 2019 to 8.5 percent today. Similarly, the share of average but still healthy companies, with ratios between 5 and 15 percent, has also fallen—from 50.3 percent to 36.8 percent over the same period.

This drop in stronger-performing firms has coincided with a rise in companies operating at weaker levels. The proportion of companies with Ebit/TA ratios below 5 percent has increased significantly, from 37.1 percent in 2019 to 54.7 percent today.

What stands out even more is that the share of companies with Ebit/TA ratios below 2 percent has almost doubled—from 21 percent to 39.5 percent—which highlights a growing concentration of firms with elevated financial vulnerability.

The downward trend in Ebit/TA across sectors suggests that many listed companies are struggling to make productive use of their capital. As more firms generate thinner operating margins relative to their asset base, the cushion they have to absorb financial shocks—whether from rising interest rates, currency volatility, or cost pressures—continues to shrink.

While these firms may not be in immediate distress, they are now far more exposed to default risk than they were just a few years ago. This growing financial strain underscores the importance of closely monitoring operational efficiency, not just earnings. For investors and lenders alike, Ebit/TA serves as an early signal of which companies are built to endure and which may falter under pressure.

Henry Ong is a Registered Financial Planner of RFP Philippines. Stock data and tools provided by First Metro Securities. To learn more about investment planning, attend 111th batch of RFP Program this May 2025. To register, e-mail at info@rfp.ph