Stock Analysis

A Closer Look At Daseke, Inc.'s (NASDAQ:DSKE) Uninspiring ROE

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NasdaqCM:DSKE
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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 Daseke, Inc. (NASDAQ:DSKE).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How To Calculate Return On Equity?

The formula for ROE is:

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

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

4.3% = US$6.2m ÷ US$145m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.04 in profit.

Does Daseke 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. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As is clear from the image below, Daseke has a lower ROE than the average (14%) in the Transportation industry.

roe
NasdaqCM:DSKE Return on Equity March 2nd 2021

Unfortunately, that's sub-optimal. That being said, a low ROE is not always a bad thing, especially if the company has low leverage as this still leaves room for improvement if the company were to take on more debt. A high debt company having a low ROE is a different story altogether and a risky investment in our books. To know the 2 risks we have identified for Daseke visit our risks dashboard for free.

The Importance Of Debt To Return On Equity

Most companies need money -- from somewhere -- to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Daseke's Debt And Its 4.3% ROE

It appears that Daseke makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 4.42. Most investors would need a low share price to be interested in a company with low ROE and high debt to equity.

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. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So you might want to check this FREE visualization of analyst forecasts for the company.

Of course Daseke may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

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What are the risks and opportunities for Daseke?

Daseke, Inc. provides transportation and logistics solutions with a focus on flatbed and specialized freight in the United States, Canada, and Mexico.

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Rewards

  • Price-To-Earnings ratio (6.7x) is below the US market (15x)

  • Earnings are forecast to grow 7.16% per year

Risks

  • Has a high level of debt

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