LKQ Corporation's (NASDAQ:LKQ) Stock Has Fared Decently: Is the Market Following Strong Financials?

By
Simply Wall St
Published
January 11, 2022
NasdaqGS:LKQ
Source: Shutterstock

LKQ's (NASDAQ:LKQ) stock up by 9.3% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to LKQ'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 LKQ

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 LKQ is:

17% = US$1.0b ÷ US$5.9b (Based on the trailing twelve months to September 2021).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.17 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 LKQ's Earnings Growth And 17% ROE

To begin with, LKQ seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 19%. Consequently, this likely laid the ground for the decent growth of 12% seen over the past five years by LKQ.

We then performed a comparison between LKQ's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 12% in the same period.

past-earnings-growth
NasdaqGS:LKQ Past Earnings Growth January 11th 2022

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. This then helps them determine if the stock is placed for a bright or bleak future. Is LKQ fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is LKQ Efficiently Re-investing Its Profits?

Summary

Overall, we are quite pleased with LKQ's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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