Philippine-listed Companies Pay 8% for the Funds Used to Run Their Businesses
According to our recent survey, the average Philippine-listed company pays 8.2% for the money it uses to run its business. This rate is the Weighted Average Cost of Capital (WACC). About 30% of these funds come from borrowing, while the remainder comes from the more expensive equity market.
A key input to company valuation is the calculation of the cost of capital. Analysts consider the cost of debt and the cost of equity to calculate this value. The mix of these two sources of capital that a business uses determines its WACC.
Companies use this cost of capital as a “hurdle” rate, seeking projects that have profitability above this minimum desired return. Financial analysts use the cost of capital as an assessment of the riskiness of the company’s future cash flows.
When an analyst assigns a high cost of capital, she thinks that the company’s future cash flows are worth much less than their nominal forecast value. In such a case, she “discounts”—or reduces—those future cash flows by this high cost of capital.
It may be helpful to think about discounting with a personal example. Imagine you lent one hundred dollars to a stranger for one week vs. lending the same amount to your most trusted friend. For the stranger, you assign a high risk that you will get that money back; hence you will discount (reduce) its one-hundred-dollar value. If you thought there was a 50% chance you would get the one hundred dollars back and an equal chance you would get nothing, the discounted value would be fifty dollars. For the friend, you may have a minimal reduction so the discounted value could be $95.
The Philippine stock market currently has 243 listed companies. The top 5% of listed companies (13 companies) account for 50% of the market capitalization, meaning the Philippine market has the lowest concentration of large market capitalization companies in ASEAN. The most concentrated market in ASEAN is Singapore, where the top 5% of listed companies (36 companies) account for 74% of the market capitalization.
In this study, we reviewed available research and surveyed five sell-side research operations in the Philippines. The survey collected data related to 7 different companies listed on the Philippine stock exchange.
The average WACC that analysts calculated in their recent discounted cash flow valuations was 8.2%. This average did not take into consideration the WACC for individual companies or sectors but just attempted to find the average used for all surveyed companies in the Philippines.
Of the total observations, the highest WACC was 9.9%, and the lowest was 6.9%.
Click here to learn the average WACC for: Thailand, Indonesia
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