Heartland Express, Inc. (NASDAQ: HTLD) stock recently showed weakness, but the financial outlook looks correct: is the market wrong?
With its stock down 11% in the past three months, it’s easy to overlook Heartland Express (NASDAQ: HTLD). However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future market price movements. Specifically, we have decided to study the ROE of Heartland Express in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Heartland Express
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Heartland Express is:
9.9% = US $ 71 million ÷ US $ 722 million (based on the last twelve months to March 2021).
The “return” is the annual profit. Another way of thinking is that for every dollar of equity, the company was able to make $ 0.10 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Heartland Express 9.9% profit growth and ROE
At first glance, Heartland Express’s ROE isn’t much to say. However, given that the company’s ROE is similar to the industry average ROE of 12%, we can think about it. On the flip side, Heartland Express has seen fairly low net income growth of 3.9% over the past five years. Keep in mind that the company’s ROE is not that high. So this could also be one of the reasons for the company’s weak profit growth.
Then, comparing Heartland Express’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 3.9% over the same period. .
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine if the future of the stock looks bright or threatening. Is Heartland Express valued enough compared to other companies? These 3 evaluation measures could help you decide.
Is Heartland Express Using Retained Profits Efficiently?
Heartland Express’s low three-year median payout rate of 9.0% (or a retention rate of 91%) should mean the company is keeping most of its profits to fuel growth. However, the low profit growth figure does not reflect this fact. So there could be another explanation for this. For example, the business of the company can deteriorate.
In addition, Heartland Express has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of business growth. business. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 8.3%. As a result, forecasts suggest that Heartland Express’s future ROE will be 11%, which is again similar to the current ROE.
All in all, it seems that Heartland Express has some positive aspects for its business. That is, decent profit growth supported by a high reinvestment rate. However, we believe that this profit growth could have been higher if the company had improved thanks to the low ROE rate. Especially considering the way the company reinvests a huge chunk of its profits. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to be redirected to our business analyst forecasts page.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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