Marten Transport, Ltd.'s (NASDAQ:MRTN) Stock Has Fared Decently: Is the Market Following Strong Financials?

By
Simply Wall St
Published
December 28, 2021
NasdaqGS:MRTN
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Marten Transport's (NASDAQ:MRTN) stock up by 6.7% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Marten Transport's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Marten Transport

How Do You 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 Marten Transport is:

13% = US$80m ÷ US$630m (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.13.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Marten Transport's Earnings Growth And 13% ROE

At first glance, Marten Transport seems to have a decent ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 18%. Although, we can see that Marten Transport saw a modest net income growth of 9.6% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also provides some context to the earnings growth seen by the company.

As a next step, we compared Marten Transport's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.0% in the same period.

past-earnings-growth
NasdaqGS:MRTN Past Earnings Growth December 28th 2021

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 Marten Transport fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Marten Transport Efficiently Re-investing Its Profits?

In Marten Transport's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 12% (or a retention ratio of 88%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Marten Transport is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, we are pretty happy with Marten Transport's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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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