Is Weakness In Knight-Swift Transportation Holdings Inc. (NYSE:KNX) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
With its stock down 5.1% over the past three months, it is easy to disregard Knight-Swift Transportation Holdings (NYSE:KNX). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Knight-Swift Transportation Holdings' ROE.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Knight-Swift Transportation Holdings
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Knight-Swift Transportation Holdings is:
13% = US$889m ÷ US$6.6b (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.13 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Knight-Swift Transportation Holdings' Earnings Growth And 13% ROE
At first glance, Knight-Swift Transportation Holdings seems to have a decent ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 26%. Knight-Swift Transportation Holdings was still able to see a decent net income growth of 17% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also does lend some color to the fairly high earnings growth seen by the company.
We then compared Knight-Swift Transportation Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.3% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is KNX fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Knight-Swift Transportation Holdings Efficiently Re-investing Its Profits?
Knight-Swift Transportation Holdings has a low three-year median payout ratio of 11%, meaning that the company retains the remaining 89% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Besides, Knight-Swift Transportation Holdings 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 12%. Regardless, Knight-Swift Transportation Holdings' ROE is speculated to decline to 10% despite there being no anticipated change in its payout ratio.
Conclusion
In total, we are pretty happy with Knight-Swift Transportation Holdings' performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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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