Are strong financials behind the recent rally in Air Transport Services Group, Inc. (NASDAQ:ATSG) shares?
Air Transport Services Group (NASDAQ:ATSG) has had a strong run in the stock market, with its stock rising 21% in the past three months. Given that the market rewards strong long-term financials, we wonder if this is the case in this case. Specifically, we decided to study the ROE of Air Transport Services Group in this article.
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 reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Air Transport Services Group
How do you calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Air Transport Services Group is:
17% = $229 million ÷ $1.3 billion (based on trailing 12 months to December 2021).
“Yield” refers to a company’s earnings over the past year. This therefore means that for each dollar of investment by its shareholder, the company generates a profit of $0.17.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Airline Group earnings growth and ROE of 17%
For starters, Air Transport Services Group seems to have a respectable ROE. Even when compared to the industry average of 19%, the company’s ROE looks pretty decent. It certainly adds some context to Air Transport Services Group’s outstanding 30% net profit growth over the past five years. We believe there could be other factors at play here as well. For example, the business has a low payout ratio or is efficiently managed.
Then, comparing with the growth in net income of the sector, we found that the growth of the airline group is quite high compared to the average growth of the sector of 11% over the same period, which is great to see.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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 effectively using its retained earnings?
Air Transport Services Group does not pay any dividends to its shareholders, which means that the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.
Overall, we believe the performance of Air Transport Services Group has been quite good. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. However, according to the latest forecasts from industry analysts, the company’s earnings are likely to decline in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.