Are Robust Financials Driving The Recent Rally In Old Dominion Freight Line, Inc.'s (NASDAQ:ODFL) Stock?

Old Dominion Freight Line (NASDAQ:ODFL) has had a great run on the share market with its stock up by a significant 8.0% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Old Dominion Freight Line's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Old Dominion Freight Line

How Is ROE Calculated?

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 Old Dominion Freight Line is:

36% = US$1.4b ÷ US$3.7b (Based on the trailing twelve months to March 2023).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.36 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Old Dominion Freight Line's Earnings Growth And 36% ROE

First thing first, we like that Old Dominion Freight Line has an impressive ROE. Secondly, even when compared to the industry average of 21% the company's ROE is quite impressive. So, the substantial 21% net income growth seen by Old Dominion Freight Line over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Old Dominion Freight Line's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Old Dominion Freight Line fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Old Dominion Freight Line Using Its Retained Earnings Effectively?

Old Dominion Freight Line's ' three-year median payout ratio is on the lower side at 9.5% implying that it is retaining a higher percentage (90%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Old Dominion Freight Line has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 13% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 28%, over the same period.

Summary

In total, we are pretty happy with Old Dominion Freight Line's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.