Is J.B. Hunt Transport Services, Inc.'s (NASDAQ:JBHT) Stock's Recent Performance A Reflection Of Its Financial Health?

J.B. Hunt Transport Services' (NASDAQ:JBHT) stock up by 4.4% over the past month. 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 J.B. Hunt Transport Services' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for J.B. Hunt Transport Services

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for J.B. Hunt Transport Services is:

24% = US$761m ÷ US$3.1b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.24 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

J.B. Hunt Transport Services' Earnings Growth And 24% ROE

To begin with, J.B. Hunt Transport Services has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 21% also portrays the company's ROE in a good light. However, for some reason, the higher returns aren't reflected in J.B. Hunt Transport Services' meagre five year net income growth average of 3.5%.Despite this, J.B. Hunt Transport Services' five year net income growth was quite low averaging at only 3.5%.Yet, J.B. Hunt Transport Services has posted measly growth of 3.5% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. A few likely reasons why this could happen is that the company could have a high payout ratio the business has allocated capital poorly, for instance.

We then performed a comparison between J.B. Hunt Transport Services' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 4.0% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is J.B. Hunt Transport Services fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is J.B. Hunt Transport Services Making Efficient Use Of Its Profits?

J.B. Hunt Transport Services' low three-year median payout ratio of 22% (or a retention ratio of 78%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, J.B. Hunt Transport Services has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 14% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.

Summary

In total, we are pretty happy with J.B. Hunt Transport Services' 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 a good amount of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.