Is Old Dominion Freight Line, Inc.'s (NASDAQ:ODFL) Latest Stock Performance A Reflection Of Its Financial Health?
Most readers would already be aware that Old Dominion Freight Line's (NASDAQ:ODFL) stock increased significantly by 19% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Old Dominion Freight Line's ROE today.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Old Dominion Freight Line
How Is ROE Calculated?
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 Old Dominion Freight Line is:
28% = US$945m ÷ US$3.4b (Based on the trailing twelve months to September 2021).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.28.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Old Dominion Freight Line's Earnings Growth And 28% ROE
To begin with, Old Dominion Freight Line has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. This likely paved the way for the modest 19% net income growth seen by Old Dominion Freight Line over the past five years. growth
As a next step, we compared Old Dominion Freight Line's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.0%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Old Dominion Freight Line is trading on a high P/E or a low P/E, relative to its industry.
Is Old Dominion Freight Line Making Efficient Use Of Its Profits?
In Old Dominion Freight Line's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.2% (or a retention ratio of 91%), which suggests that the company is investing most of its profits to grow its business.
Additionally, Old Dominion Freight Line has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 8.6%. As a result, Old Dominion Freight Line's ROE is not expected to change by much either, which we inferred from the analyst estimate of 26% for future ROE.
Conclusion
Overall, we are quite pleased with Old Dominion Freight Line's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
