Is Old Dominion Freight Line, Inc.'s (NASDAQ:ODFL) Recent Stock Performance Tethered To Its Strong Fundamentals?
Most readers would already be aware that Old Dominion Freight Line's (NASDAQ:ODFL) stock increased significantly by 8.5% over the past 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. Particularly, we will be paying attention to Old Dominion Freight Line's ROE today.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Old Dominion Freight Line
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 Old Dominion Freight Line is:
35% = US$1.2b ÷ US$3.6b (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.35 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Old Dominion Freight Line's Earnings Growth And 35% ROE
To begin with, Old Dominion Freight Line has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 26% which is quite remarkable. Probably as a result of this, Old Dominion Freight Line was able to see a decent net income growth of 20% over the last five years.
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 8.3% 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Old Dominion Freight Line is trading on a high P/E or a low P/E, relative to its industry.
Is Old Dominion Freight Line Making Efficient Use Of Its Profits?
In Old Dominion Freight Line's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.2% (or a retention ratio of 91%), which suggests that the company is investing most of its profits to grow its business.
Additionally, Old Dominion Freight Line has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 12% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 26% over the same period.
Summary
Overall, we are quite pleased with Old Dominion Freight Line's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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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.
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