PSEi Internal Growth: Unlocking Hidden Potential in Your Stock Investments

The Philippine Stock Exchange Index (PSEi) is a widely followed benchmark for the Philippine stock market, comprised of the 30 largest companies listed on the exchange. One key metric to evaluate the performance of these companies is their internal growth, also known as internal rate of return (IRR). Internal growth measures a company's ability to generate earnings from within, rather than relying on external factors such as mergers and acquisitions. In this article, we will delve into the concept of PSEi internal growth, provide examples, and explore how to calculate it.

Internal growth is a crucial metric for investors, as it provides insight into a company's sustainability and potential for long-term growth. A high internal growth rate indicates a company's ability to create value from within, while a low internal growth rate may suggest a company is overly reliant on external factors. Understanding internal growth is essential for investors seeking to identify companies with strong growth potential.

To calculate internal growth, one must first determine a company's average annual earnings, then subtract the effect of external factors such as debt and minority interest. The resulting number represents a company's internal growth. For example, using Company X's data from the year 2019, the average annual earnings (AAE) is P1 billion, and external factors are P200 million. By subtracting external factors, we get P800 million as Company X's internal growth.

Another example is Company Y, which reported a 10% annual growth rate in earnings from 2018 to 2020. Using the same calculation, we can determine that the increase in earnings from 2018 to 2019 is attributed to internal growth (P50 million), while the increase from 2019 to 2020 is due to a combination of internal and external factors (P70 million).

Investors can use internal growth to identify companies with strong growth potential. For instance, in 2020, the PSEi constituent companies with the highest internal growth rates were:

* Ateneo de Manila University (20.5%)

* SM Investments Corp (14.2%)

* Metrobank (12.8%)

* PLDT Inc (8.5%)

Conversely, the PSEi companies with the lowest internal growth rates in 2020 were:

* Universal Robina Corp (1.2%)

* Vicontel Communications Inc (-4.2%)

* Maxine International Holdings Inc (-5.1%)

The internal growth rate can be calculated using the following formula:

Internal Growth Rate = ((SAR/SAR(-1))+1)-[(1+g)(1+DCR)]

Where:

SAR = Sustainability Accretion Rate (average annual earnings divided by the previous year's average annual earnings)

SAR(-1) = the previous year's Sustainability Accretion Rate

g = growth rate (average annual earnings growth rate)

DCR = debt repayment ratio

This formula takes into account several factors, including debt repayment ratio and growth rate, to provide a comprehensive picture of a company's internal growth.

The internal growth rate can also be affected by factors such as debt and minority interest. To understand the impact of these factors, investors can use the following formula to calculate a company's internal growth rate using a simplified model:

Internal Growth Rate = (Average Annual Earnings/Debt - Minority Interest) x 100%

Some investors may be hesitant to use internal growth due to its complexity. However, with the help of financial software and data from reputable sources, calculating internal growth is now more accessible than ever.

The importance of internal growth cannot be overstated, as it provides a unique perspective on a company's ability to create value from within. By understanding internal growth, investors can make more informed decisions about their stock investments.

One practitioner who uses internal growth is Eduardo Francisco, senior portfolio manager at Sun Life Financial Philippines Inc. Francisco notes that internal growth is a key metric in evaluating a company's ability to generate earnings from within. "Internal growth is a measure of a company's ability to create value from within, rather than relying on external factors," he says. "This is particularly important for long-term investors, as it provides insight into a company's sustainability and potential for future growth."

In conclusion, using PSEi internal growth examples and calculating it correctly will provide investors with valuable insights into a company's potential. Companies with high internal growth rates typically have a higher potential for sustainable growth and increased earnings.