J.B. Hunt Transport Services (NASDAQ:JBHT) has had a rough three months with its share price down 20%.   But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health.     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.

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 J.B. Hunt Transport Services is:

16% = US$658m ÷ US$4.2b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year.  So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.16.

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.  Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

A Side By Side comparison of J.B. Hunt Transport Services' Earnings Growth And 16% ROE

To begin with, J.B. Hunt Transport Services seems to have a respectable ROE.   Especially when compared to the industry average of 11% the company's ROE looks pretty impressive.   Probably as a result of this, J.B. Hunt Transport Services was able to see a decent growth of 14% over the last five years.    

As a next step, we compared J.B. Hunt Transport Services' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 16% in the same period.  

NasdaqGS:JBHT Past Earnings Growth June 4th 2024

Earnings growth is a huge factor in stock valuation.  The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in.  Doing so will help them establish if the stock's future looks promising or ominous.    What is JBHT worth today? The  intrinsic value infographic in our free research report  helps visualize whether JBHT is currently mispriced by the market.  

Is J.B. Hunt Transport Services Efficiently Re-investing Its Profits?

In J.B. Hunt Transport Services' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 18% (or a retention ratio of 82%), which suggests that the company is investing most of its profits to grow its business.  

Additionally, J.B. Hunt Transport Services 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.      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 16%.   Regardless, the future ROE for J.B. Hunt Transport Services is predicted to rise to 19% despite there being not much change expected in its payout ratio.    

Summary  

In total, we are pretty happy with J.B. Hunt Transport Services' performance.      Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings.       We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate.     To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.