Yahoo Finance Freightways Group Limited's (NZSE:FRW) Stock Has Shown A Decent Performance: Have Financials A Role To Play?
Freightways Group's (NZSE:FRW) stock up by 4.3% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Freightways Group's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Freightways Group
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 Freightways Group is:
14% = NZ$71m ÷ NZ$490m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.14 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Freightways Group's Earnings Growth And 14% ROE
At first glance, Freightways Group seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 13%. This probably goes some way in explaining Freightways Group's moderate 6.2% growth over the past five years amongst other factors.
As a next step, we compared Freightways Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 27% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is FRW fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Freightways Group Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 87% (or a retention ratio of 13%) for Freightways Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Freightways Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 82%. However, Freightways Group's ROE is predicted to rise to 20% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we feel that Freightways Group certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.
