U.S. markets closed
  • S&P Futures

    3,432.75
    -19.00 (-0.55%)
     
  • Dow Futures

    28,036.00
    -153.00 (-0.54%)
     
  • Nasdaq Futures

    11,616.00
    -47.50 (-0.41%)
     
  • Russell 2000 Futures

    1,621.70
    -13.90 (-0.85%)
     
  • Crude Oil

    39.20
    -0.65 (-1.63%)
     
  • Gold

    1,900.20
    -5.00 (-0.26%)
     
  • Silver

    24.40
    -0.28 (-1.13%)
     
  • EUR/USD

    1.1841
    -0.0027 (-0.22%)
     
  • 10-Yr Bond

    0.8410
    -0.0070 (-0.83%)
     
  • Vix

    27.55
    -0.56 (-1.99%)
     
  • GBP/USD

    1.3030
    -0.0008 (-0.06%)
     
  • USD/JPY

    104.8300
    +0.1400 (+0.13%)
     
  • BTC-USD

    13,106.91
    +86.02 (+0.66%)
     
  • CMC Crypto 200

    263.72
    +2.26 (+0.86%)
     
  • FTSE 100

    5,860.28
    +74.63 (+1.29%)
     
  • Nikkei 225

    23,514.41
    -2.18 (-0.01%)
     

Should You Be Worried About Insulet Corporation's (NASDAQ:PODD) 3.2% Return On Equity?

Simply Wall St
·4 mins read

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). By way of learning-by-doing, we'll look at ROE to gain a better understanding of Insulet Corporation (NASDAQ:PODD).

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Insulet

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Insulet is:

3.2% = US$18m ÷ US$563m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.03 in profit.

Does Insulet Have A Good Return On Equity?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. If you look at the image below, you can see Insulet has a lower ROE than the average (12%) in the Medical Equipment industry classification.

roe
roe

Unfortunately, that's sub-optimal. Although, we think that a lower ROE could still mean that a company has the opportunity to better its returns with the use of leverage, provided its existing debt levels are low. When a company has low ROE but high debt levels, we would be cautious as the risk involved is too high. To know the 4 risks we have identified for Insulet visit our risks dashboard for free.

How Does Debt Impact ROE?

Virtually all companies need money to invest in the business, to grow profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first and second cases, the ROE will reflect this use of cash for investment in the business. 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.

Combining Insulet's Debt And Its 3.2% Return On Equity

It's worth noting the high use of debt by Insulet, leading to its debt to equity ratio of 1.58. With a fairly low ROE, and significant use of debt, it's hard to get excited about this business at the moment. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.

Summary

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In our books, the highest quality companies have high return on equity, despite low debt. 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. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.