Stock Analysis

How Good Is Poste Italiane S.p.A. (BIT:PST), When It Comes To ROE?

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BIT:PST
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Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). We'll use ROE to examine Poste Italiane S.p.A. (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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Poste Italiane

How Do You Calculate Return On Equity?

The formula for ROE is:

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

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

13% = €1.6b ÷ €12b (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.13.

Does Poste Italiane Have A Good ROE?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. If you look at the image below, you can see Poste Italiane has a similar ROE to the average in the Insurance industry classification (11%).

roe
BIT:PST Return on Equity July 14th 2022

That's neither particularly good, nor bad. 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 so, this increases its exposure to financial risk. To know the 2 risks we have identified for Poste Italiane visit our risks dashboard for free.

Why You Should Consider Debt When Looking At ROE

Most companies need money -- from somewhere -- to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the use of debt will improve the returns, but will not change the equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Combining Poste Italiane's Debt And Its 13% Return On Equity

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 7.49. Its ROE is respectable, but it's not so impressive once you consider all of the debt.

Summary

Return on equity is one way we can compare its business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.

Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course Poste Italiane may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

Valuation is complex, but we're helping make it simple.

Find out whether Poste Italiane is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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)
Valuation4
Future Growth1
Past Performance5
Financial Health1
Dividends4

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

Solid track record, good value and pays a dividend.