A Note On Poste Italiane SpA's (BIT:PST) ROE and Debt To Equity

December 25, 2021
  •  Updated
March 25, 2022
BIT:PST
Source: Shutterstock

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. We'll use ROE to examine Poste Italiane SpA (BIT:PST), by way of a worked example.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Poste Italiane

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Poste Italiane is:

12% = €1.5b ÷ €13b (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.12 in profit.

Does Poste Italiane Have A Good ROE?

Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. You can see in the graphic below that Poste Italiane has an ROE that is fairly close to the average for the Insurance industry (11%).

roe
BIT:PST Return on Equity December 25th 2021

So while the ROE is not exceptional, at least its acceptable. Even if the ROE is respectable when compared to the industry, its worth checking if the firm's ROE is being aided by high debt levels. If a company takes on too much debt, it is at higher risk of defaulting on interest payments. Our risks dashboardshould have the 3 risks we have identified for Poste Italiane.

How Does Debt Impact Return On Equity?

Virtually all companies need money to invest in the business, to grow profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. That will make the ROE look better than if no debt was used.

Poste Italiane's Debt And Its 12% ROE

It appears that Poste Italiane makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 7.70. The combination of a rather low ROE and high debt to equity is a negative, in our book.

Conclusion

Return on equity is useful for comparing the quality of different businesses. In our books, the highest quality companies have high return on equity, despite low debt. All else being equal, a higher ROE is better.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to check this FREE visualization of analyst forecasts for the company.

But note: Poste Italiane may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.

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About BIT:PST

Poste Italiane

Poste Italiane S.p.A. provides postal, logistics, and financial and insurance products and services in Italy.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation5
Future Growth1
Past Performance5
Financial Health2
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

Undervalued with solid track record and pays a dividend.