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It’s hard to get excited after looking at the recent performance of CH Robinson Worldwide (NASDAQ: CHRW), as its stock has fallen 5.8% in the past month. But if you pay attention to it, you might find that its key financial metrics look pretty decent, which could mean that the stock could potentially rise in the long run given how markets typically reward longer term fundamentals. resilient. In this article, we have decided to focus on the ROE of CH Robinson Worldwide.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a company uses company capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for CH Robinson Worldwide
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of CH Robinson Worldwide is:
27% = US $ 506M ÷ US $ 1.9B (based on the last twelve months up to December 2020).
The “return” is the amount earned after tax over the past twelve months. This therefore means that for every dollar invested by its shareholder, the company generates a profit of 0.27 dollars.
What is the relationship between ROE and profit growth?
So far we have learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
CH Robinson Worldwide profit growth and ROE of 27%
For starters, CH Robinson Worldwide has a pretty high ROE, which is interesting. Second, even compared to the industry average of 11%, the company’s ROE is quite impressive. Given the circumstances, we can’t help but wonder why CH Robinson Worldwide has experienced little or no growth over the past five years. Based on this, we believe that there might be other reasons that have not been addressed so far in this article that may be hampering the growth of the business. For example, the company pays out a huge portion of its profits as dividends or faces competitive pressures.
Second, we compared CH Robinson Worldwide’s net income growth to that of the industry and were disappointed to see that the company’s growth is below the industry average growth of 13% at during the same period.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. Is CHRW valued? This Intrinsic Business Value infographic has everything you need to know.
Is CH Robinson Worldwide Using Profits Effectively?
Despite a normal three-year median payout rate of 48% (or retention rate of 52%), CH Robinson Worldwide has not experienced significant earnings growth. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.
Additionally, CH Robinson Worldwide has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows the company’s future payout ratio over the next three years is expected to be around 44%. Therefore, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 29%.
Conclusion
All in all, it seems that CH Robinson Worldwide has positive aspects for its activities. However, given the high ROE and high profit retention, we would expect the company to see strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. That said, looking at current analysts’ estimates, we saw that the company’s earnings are expected to pick up. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. It is not a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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