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Is United Parcel Service, Inc.'s (NYSE:UPS) Stock's Recent Performance A Reflection Of Its Financial Health?
United Parcel Service's (NYSE:UPS) stock is up by 4.7% 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. Specifically, we decided to study United Parcel Service's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for United Parcel Service
How Is ROE Calculated?
ROE 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 United Parcel Service is:
58% = US$12b ÷ US$20b (Based on the trailing twelve months to December 2022).
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 $0.58.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
United Parcel Service's Earnings Growth And 58% ROE
First thing first, we like that United Parcel Service has an impressive ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Under the circumstances, United Parcel Service's considerable five year net income growth of 21% was to be expected.
Next, on comparing with the industry net income growth, we found that United Parcel Service's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about United Parcel Service's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is United Parcel Service Making Efficient Use Of Its Profits?
United Parcel Service has a significant three-year median payout ratio of 58%, meaning the company only retains 42% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Besides, United Parcel Service has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 52%. However, United Parcel Service's future ROE is expected to decline to 36% despite there being not much change anticipated in the company's payout ratio.
Conclusion
Overall, we are quite pleased with United Parcel Service's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
What are the risks and opportunities for United Parcel Service?
United Parcel Service, Inc., a package delivery company, provides transportation and delivery, distribution, contract logistics, ocean freight, airfreight, customs brokerage, and insurance services.
Risks
Earnings are forecast to decline by an average of 1.9% per year for the next 3 years
Significant insider selling over the past 3 months
Has a high level of debt
Further research on
United Parcel Service
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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.
About NYSE:UPS
United Parcel Service
United Parcel Service, Inc., a package delivery company, provides transportation and delivery, distribution, contract logistics, ocean freight, airfreight, customs brokerage, and insurance services.
Established dividend payer with adequate balance sheet.
