U.S. Markets open in 3 hrs 48 mins

With An ROE Of 5.51%, Has Pathfinder Bancorp Inc’s (NASDAQ:PBHC) Management Done Well?

Lee Kay

Pathfinder Bancorp Inc (NASDAQ:PBHC) outperformed the Thrifts and Mortgage Finance industry on the basis of its ROE – producing a higher 5.51% relative to the peer average of 5.05% over the past 12 months. On the surface, this looks fantastic since we know that PBHC has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of PBHC’s ROE. View our latest analysis for Pathfinder Bancorp

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

Return on Equity (ROE) weighs Pathfinder Bancorp’s profit against the level of its shareholders’ equity. An ROE of 5.51% implies $0.06 returned on every $1 invested. 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. Pathfinder Bancorp’s cost of equity is 9.75%. This means Pathfinder Bancorp’s returns actually do not cover its own cost of equity, with a discrepancy of -4.24%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates in return. ROE can be broken down into three different 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:PBHC Last Perf Apr 4th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover shows how much revenue Pathfinder Bancorp can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since financial leverage can artificially inflate ROE, we need to look at how much debt Pathfinder Bancorp currently has. At 143.13%, Pathfinder Bancorp’s debt-to-equity ratio appears balanced and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.

NasdaqCM:PBHC Historical Debt Apr 4th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Pathfinder Bancorp exhibits a strong ROE against its peers, however it was not high enough to cover its own cost of equity this year. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Pathfinder Bancorp, I’ve compiled three key factors you should further research:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Valuation: What is Pathfinder Bancorp worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Pathfinder Bancorp is currently mispriced by the market.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Pathfinder Bancorp? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


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.