Stock Analysis

Can U.S. Xpress Enterprises, Inc. (NYSE:USX) Improve Its Returns?

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NYSE:USX
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One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. By way of learning-by-doing, we'll look at ROE to gain a better understanding of U.S. Xpress Enterprises, Inc. (NYSE:USX).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for U.S. Xpress Enterprises

How Is ROE Calculated?

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 U.S. Xpress Enterprises is:

6.8% = US$18m ÷ US$261m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.07.

Does U.S. Xpress Enterprises Have A Good ROE?

Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As shown in the graphic below, U.S. Xpress Enterprises has a lower ROE than the average (14%) in the Transportation industry classification.

roe
NYSE:USX Return on Equity March 2nd 2021

That's not what we like to see. 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. When a company has low ROE but high debt levels, we would be cautious as the risk involved is too high. To know the 2 risks we have identified for U.S. Xpress Enterprises visit our risks dashboard for free.

Why You Should Consider Debt When Looking At ROE

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 used for growth will improve returns, but won't affect the total equity. That will make the ROE look better than if no debt was used.

Combining U.S. Xpress Enterprises' Debt And Its 6.8% Return On Equity

It's worth noting the high use of debt by U.S. Xpress Enterprises, leading to its debt to equity ratio of 1.37. With a fairly low ROE, and significant use of debt, it's hard to get excited about this business at the moment. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.

Conclusion

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So I think it may be worth checking this free report on analyst forecasts for the company.

But note: U.S. Xpress Enterprises may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.

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What are the risks and opportunities for U.S. Xpress Enterprises?

U.S. Xpress Enterprises, Inc. operates as an asset-based truckload carrier providing services primarily in the United States.

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Risks

  • Debt is not well covered by operating cash flow

  • Does not have a meaningful market cap ($84M)

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Share Price

Market Cap

1Y Return

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