Knight-Swift Transportation Holdings (NYSE:KNX) has had a great run on the share market with its stock up by a significant 21% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Knight-Swift Transportation Holdings’ ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for Knight-Swift Transportation Holdings
How Do You Calculate Return On Equity?
Return on equity 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 Knight-Swift Transportation Holdings is:
5.5% = US$310m ÷ US$5.7b (Based on the trailing twelve months to December 2019).
The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.05 in profit.
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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
A Side By Side comparison of Knight-Swift Transportation Holdings’ Earnings Growth And 5.5% ROE
At first glance, Knight-Swift Transportation Holdings’ ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 13% either. Despite this, surprisingly, Knight-Swift Transportation Holdings saw an exceptional 36% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as – high earnings retention or an efficient management in place.
We then compared Knight-Swift Transportation Holdings’ net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 12% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Knight-Swift Transportation Holdings”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Knight-Swift Transportation Holdings Efficiently Re-investing Its Profits?
Knight-Swift Transportation Holdings has a really low three-year median payout ratio of 18%, meaning that it has the remaining 82% left over to reinvest into its business. So it looks like Knight-Swift Transportation Holdings is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Knight-Swift Transportation Holdings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 12% over the next three years. The fact that the company’s ROE is expected to rise to 6.9% over the same period is explained by the drop in the payout ratio.
Summary
In total, it does look like Knight-Swift Transportation Holdings has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.