USA Truck, Inc.’s (NASDAQ:USAK) Stock Is Going Strong: Is the Market Following Fundamentals?

USA Truck’s (NASDAQ:USAK) stock is up by a considerable 8.3% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study USA Truck’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity. Check out our latest analysis for USA Truck

How Is ROE Calculated?

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 USA Truck is:

19% = US£19m / US£99m (Based on the trailing twelve months to September 2021). The ‘return’ is the income the business earned over the last year.

Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.19 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of USA Truck’s Earnings Growth And 19% ROE

To start with, USA Truck’s ROE looks acceptable.

Even when compared to the industry average of 18% the company’s ROE looks quite decent. This certainly adds some context to USA Truck’s exceptional 22% net income growth seen over the past five years. However, there could also be other drivers behind this growth.

For instance, the company has a low payout ratio or is being managed efficiently.
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As a next step, we compared USA Truck’s 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 6.1%.

past-earnings-growth

past-earnings-growth

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. Is USA Truck fairly valued compared to other companies?

These 3 valuation measures might help you decide.

Is USA Truck Efficiently Re-investing Its Profits?

USA Truck doesn’t pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.

Summary

On the whole, we feel that USA Truck’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return.

Unsurprisingly, this has led to an impressive earnings growth. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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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