Could the market be wrong about Air Transport Services Group, Inc. (NASDAQ:ATSG) given its attractive financial outlook?
With its shares down 10% in the past three months, it’s easy to ignore Air Transport Services Group (NASDAQ:ATSG). But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. 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 simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Air Transport Services Group
How to calculate return on equity?
The return on equity 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% = $236 million ÷ $1.4 billion (based on trailing 12 months to March 2022).
“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.17.
What does ROE have to do with 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 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. 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.
A side-by-side comparison of Airline Services Group’s 17% earnings and ROE growth
For starters, Air Transport Services Group’s ROE looks acceptable. Still, the fact that the company’s ROE is below the industry average of 23% tempers our expectations. However, we are pleased to see the impressive 34% growth in net profit achieved by Air Transport Services Group over the past five years. We believe there could be other factors at play here. 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 certainly provides some context to the strong earnings growth the company is seeing.
In a next step, we benchmarked the growth of Air Transport Services Group’s net profit with the industry, and fortunately, we found that the growth observed by the company is higher than the industry average growth of 11 %.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is Air Transport Services Group valued at its fair value compared to other companies? These 3 assessment metrics might help you decide.
Does Air Transport Services Group effectively reinvest its profits?
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, it’s good to see that the company has seen significant earnings growth supported by a respectable ROE and a high reinvestment rate. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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.
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