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With its stock down 11% over the past three months, it is easy to disregard J.B. Hunt Transport Services (NASDAQ:JBHT). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for J.B. Hunt Transport 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 J.B. Hunt Transport Services is:
24% = US$924m ÷ US$3.8b (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.24 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 J.B. Hunt Transport Services' Earnings Growth And 24% ROE
First thing first, we like that J.B. Hunt Transport Services has an impressive ROE. Further, even comparing with the industry average if 21%, the company's ROE is quite respectable. So, J.B. Hunt Transport Services' moderate 11% growth over the past five years was probably backed by the high ROE.
Next, on comparing J.B. Hunt Transport Services' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 J.B. Hunt Transport Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.