Frontier Transport Holdings' (JSE:FTH) stock is up by a considerable 15% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Frontier Transport Holdings' ROE.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You Calculate Return On Equity?
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 Frontier Transport Holdings is:
15% = R199m ÷ R1.3b (Based on the trailing twelve months to March 2021).
The 'return' is the yearly profit. Another way to think of that is that for every ZAR1 worth of equity, the company was able to earn ZAR0.15 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 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.
Frontier Transport Holdings' Earnings Growth And 15% ROE
On the face of it, Frontier Transport Holdings' ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 9.2% doesn't go unnoticed by us. However, Frontier Transport Holdings has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay flat.
Next, on comparing with the industry net income growth, we found that the industry grew its earnings by4.1% in the same period.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Frontier Transport Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Frontier Transport Holdings Efficiently Re-investing Its Profits?
Despite having a normal three-year median payout ratio of 48% (implying that the company keeps 52% of its income) over the last three years, Frontier Transport Holdings has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Frontier Transport Holdings has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
On the whole, we do feel that Frontier Transport Holdings has some positive attributes. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Frontier Transport Holdings' past profit growth, check out this visualization of past earnings, revenue and cash flows.
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.
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