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Most readers would already be aware that C.H. Robinson Worldwide's (NASDAQ:CHRW) stock increased significantly by 5.6% over the past month. 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. Specifically, we decided to study C.H. Robinson Worldwide's ROE in this article.
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?
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 C.H. Robinson Worldwide is:
27% = US$506m ÷ US$1.9b (Based on the trailing twelve months to December 2020).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.27 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
C.H. Robinson Worldwide's Earnings Growth And 27% ROE
To begin with, C.H. Robinson Worldwide has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 9.3% also doesn't go unnoticed by us. Despite this, C.H. Robinson Worldwide's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared C.H. Robinson Worldwide's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.9% in the same period, which is a bit concerning.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for CHRW? You can find out in our latest intrinsic value infographic research report.
Is C.H. Robinson Worldwide Using Its Retained Earnings Effectively?
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, C.H. Robinson Worldwide has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
In addition, C.H. Robinson Worldwide has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 44% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 28%.
In total, it does look like C.H. Robinson Worldwide has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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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