Declining Stock and Solid Fundamentals: Is The Market Wrong About Old Dominion Freight Line, Inc. (NASDAQ:ODFL)?

editorial-team@simplywallst.com (Simply Wall St)

Fri, Feb 7, 2025, 7:00 AM 4 min read

With its stock down 13% over the past three months, it is easy to disregard Old Dominion Freight Line (NASDAQ:ODFL). 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 Old Dominion Freight Line's 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Old Dominion Freight Line

How Do You Calculate Return On Equity?

The formula for ROE 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:

28% = US$1.2b ÷ US$4.2b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.28 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.

Old Dominion Freight Line's Earnings Growth And 28% ROE

To begin with, Old Dominion Freight Line has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Probably as a result of this, Old Dominion Freight Line was able to see a decent net income growth of 15% over the last five years.

We then performed a comparison between Old Dominion Freight Line's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 15% in the same 5-year period.

past-earnings-growth — NasdaqGS:ODFL Past Earnings Growth February 7th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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.

Is Old Dominion Freight Line Efficiently Re-investing Its Profits?

Old Dominion Freight Line's three-year median payout ratio to shareholders is 12% (implying that it retains 88% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Old Dominion Freight Line is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 21% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

Overall, we are quite pleased with Old Dominion Freight Line's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.