Knight-Swift Transportation Holdings Inc.'s (NYSE:KNX) Stock Is Going Strong: Is the Market Following Fundamentals?

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Knight-Swift Transportation Holdings (NYSE:KNX) has had a great run on the share market with its stock up by a significant 24% over the last month. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Knight-Swift Transportation Holdings’ ROE.

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.

View our latest analysis for Knight-Swift Transportation Holdings

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 Knight-Swift Transportation Holdings is:

10% = US$632m ÷ US$6.3b (Based on the trailing twelve months to September 2021).

The ‘return’ is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.10 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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.

Knight-Swift Transportation Holdings’ Earnings Growth And 10% ROE

To begin with, Knight-Swift Transportation Holdings seems to have a respectable ROE. Be that as it may, the company’s ROE is still quite lower than the industry average of 18%. Knight-Swift Transportation Holdings was still able to see a decent net income growth of 18% over the past five years. So, there might be other aspects that are positively influencing earnings growth. Such as – high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also provides some context to the earnings growth seen by the company.

As a next step, we compared Knight-Swift Transportation Holdings’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.0%.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. What is KNX worth today? The intrinsic value infographic in our free research report helps visualize whether KNX is currently mispriced by the market.

Is Knight-Swift Transportation Holdings Making Efficient Use Of Its Profits?

In Knight-Swift Transportation Holdings’ case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 11% (or a retention ratio of 89%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Knight-Swift Transportation Holdings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 10%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 9.7%.

Summary

In total, we are pretty happy with Knight-Swift Transportation Holdings’ performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. 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.

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.

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