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What is Behind Elmira Savings Bank’s (ESBK) Superior ROE?

Mary Ramos

Elmira Savings Bank (NASDAQ:ESBK) delivered an ROE of 7.35% over the past 12 months, which is an impressive feat relative to its industry average of 7.15% during the same period. While the impressive ratio tells us that ESBK has made significant profits from little equity capital, ROE doesn’t tell us if ESBK has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable ESBK’s ROE is. See our latest analysis for ESBK

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) weighs ESBK’s profit against the level of its shareholders’ equity. It essentially shows how much ESBK can generate in earnings given the amount of equity it has raised. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. ESBK’s cost of equity is 9.28%. Given a discrepancy of -1.93% between return and cost, this indicated that ESBK may be paying more for its capital than what it’s generating in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

NasdaqCM:ESBK Last Perf Oct 20th 17
NasdaqCM:ESBK Last Perf Oct 20th 17

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from ESBK’s asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable ESBK’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check ESBK’s historic debt-to-equity ratio. At 64.34%, ESBK’s debt-to-equity ratio appears sensible and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.

NasdaqCM:ESBK Historical Debt Oct 20th 17
NasdaqCM:ESBK Historical Debt Oct 20th 17

What this means for you:

Are you a shareholder? ESBK’s ROE is impressive relative to the industry average, though its returns were not strong enough to cover its own cost of equity. However, investors shouldn’t despair since ROE is not inflated by excessive debt, which means ESBK still has room to improve shareholder returns by raising debt to fund new investments. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.

Are you a potential investor? If ESBK has been on your watch list for a while, making an investment decision based on ROE alone is unwise. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Elmira Savings Bank to help you make a more informed investment decision.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.