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It is hard to get excited after looking at J.B. Hunt Transport Services' (NASDAQ:JBHT) recent performance, when its stock has declined 6.8% over the past three months. 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 J.B. Hunt Transport Services' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 J.B. Hunt Transport Services
How To 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 J.B. Hunt Transport Services is:
14% = US$571m ÷ US$4.0b (Based on the trailing twelve months to December 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.14 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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
J.B. Hunt Transport Services' Earnings Growth And 14% ROE
To start with, J.B. Hunt Transport Services' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 14%. This certainly adds some context to J.B. Hunt Transport Services' moderate 6.0% net income growth seen over the past five years.
We then compared J.B. Hunt Transport Services' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 15% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 JBHT? You can find out in our latest intrinsic value infographic research report.