Yahoo Finance Patriot Transportation Holding, Inc. (NASDAQ:PATI) Has Fared Decently But Fundamentals Look Uncertain: What Lies Ahead For The Stock?
Patriot Transportation Holding's (NASDAQ:PATI) stock up by 8.7% over the past three months. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Patriot Transportation Holding'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Patriot Transportation Holding
How To Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Patriot Transportation Holding is:
3.2% = US$1.1m ÷ US$36m (Based on the trailing twelve months to June 2021).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.03 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Patriot Transportation Holding's Earnings Growth And 3.2% ROE
As you can see, Patriot Transportation Holding's ROE looks pretty weak. Even compared to the average industry ROE of 17%, the company's ROE is quite dismal. For this reason, Patriot Transportation Holding's five-year net income decline of 40% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
So, as a next step, we compared Patriot Transportation Holding's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 4.8% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Patriot Transportation Holding's valuation, check out this gauge of its price-to-earnings ratio , as compared to its industry.
Is Patriot Transportation Holding Using Its Retained Earnings Effectively?
Patriot Transportation Holding has paid two special dividends over the past two years, but we would like to see more regular and consistent payments before we can comment on the company's dividend policy and its treatment of retained earnings.
Summary
Overall, we have mixed feelings about Patriot Transportation Holding. Its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Patriot Transportation Holding visit our risks dashboard for free.
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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