Air Transport Services Group, Inc. (NASDAQ:ATSG) Stocks Are on an Uptrend: Are Strong Financials Driving the Market?
Air Transport Services Group (NASDAQ:ATSG) stock is up 14% in the past month. Given that the market rewards strong long-term financials, we wonder if this is the case in this case. In particular, we will pay attention to the ROE of Air Transport Services Group today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Air Transport Services Group is:
15% = $211 million ÷ $1.4 billion (based on trailing 12 months to June 2022).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.15.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
15% earnings growth and ROE of the Airline Services Group
For starters, Air Transport Services Group’s ROE looks acceptable. Regardless, the company’s ROE is still well below the industry average of 24%. Yet, we can see that Air Transport Services Group has experienced remarkable net profit growth of 35% over the past five years. Hence, there could be other causes behind this growth. Such as – high revenue retention or effective management in place. Keep in mind that the company has a respectable ROE. It’s just that the industry’s ROE is higher. So that also gives some color to the strong earnings growth the company is seeing.
We then benchmarked Air Transport Services Group’s net profit growth with the industry and are pleased to see that the company’s growth figure is higher than the industry which recorded a growth rate of 15% over the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you may want to check whether Air Transport Services Group is trading on a high P/E or on a low P/E, relative to its industry.
Is Air Transport Services Group using its profits efficiently?
Air Transport Services Group currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.
Overall, we are quite satisfied with the performance of Air Transport Services Group. In particular, we appreciate the fact that the company reinvests heavily in its business at a moderate rate of return. Unsurprisingly, this led to impressive earnings growth. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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