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Will Weakness in P.A.M. Transportation Services, Inc.'s (NASDAQ:PTSI) Stock Prove Temporary Given Strong Fundamentals?

P.A.M. Transportation Services (NASDAQ:PTSI) has had a rough three months with its share price down 16%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to P.A.M. Transportation Services' ROE today.

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 P.A.M. Transportation Services

How Do You Calculate Return On Equity?

Return on equity 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 P.A.M. Transportation Services is:

36% = US$101m ÷ US$283m (Based on the trailing twelve months to September 2022).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.36 in profit.

What Is The Relationship Between ROE And 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.

P.A.M. Transportation Services' Earnings Growth And 36% ROE

Firstly, we acknowledge that P.A.M. Transportation Services has a significantly high ROE. Secondly, even when compared to the industry average of 27% the company's ROE is quite impressive. So, the substantial 28% net income growth seen by P.A.M. Transportation Services over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that P.A.M. Transportation Services' growth is quite high when compared to the industry average growth of 8.3% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about P.A.M. Transportation Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is P.A.M. Transportation Services Using Its Retained Earnings Effectively?

Given that P.A.M. Transportation Services doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with P.A.M. Transportation Services' 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for P.A.M. Transportation Services.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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