Old Dominion Freight Line (NASDAQ:ODFL) has had a rough month with its share price down 20%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Old Dominion Freight Line’s 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Old Dominion Freight Line
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 Old Dominion Freight Line is:
30% = US$1.2b ÷ US$4.2b (Based on the trailing twelve months to September 2024).
The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.30 in profit.
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. 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.
To begin with, Old Dominion Freight Line has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 15% the company’s ROE is quite impressive. This likely paved the way for the modest 17% net income growth seen by Old Dominion Freight Line over the past five years.
As a next step, we compared Old Dominion Freight Line’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.0%.
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. If you’re wondering about Old Dominion Freight Line’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
